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Why property is a good investment

Property investing has been a hot topic in wealth creation circles. Savvy homeowners across the country have learnt that the appreciating value of their own home generates equity; equity they can use to increase their wealth. We speak with Rachel Barnes from Property Women, and ask her why property is a good investment.

Stability

Rachel says one of the most attractive features of property investing is the fact that the market is not subject to volatility. Property also has certain advantages over other asset classes, such as shares. “When you compare property investing to investing in shares, whilst property prices can plateau out and sometimes even dip slightly, a share can dramatically change in value within an hour on any given day,” explains Rachel. “Shares are subject to a number of external influences that can have an immediate impact on the value of a share.”

Tangible

Property is tangible, says Rachel. You can physically do something with it. For example, your family or friends could live in the property, or you could subdivide or renovate the property and increase its value. Whereas, with a share it is simply an expensive piece of paper which could potentially be worth nothing tomorrow. “In my experience I have found woman generally prefer and enjoy the idea of investing in something which is tangible and useful,” says Rachel.

Control

Property investing allows for a greater level of control over your investment, says Rachel. “With shares, for example, the value is out of your control. With property, you can often buy at a reduced value, perhaps because a vendor is keen to sell their property. Buying at anything less than market value is equity for nothing.”

She points out that you can also do things with the property to further increase its value. Some property investors will renovate, some will see a block of land and decide to subdivide and double their equity. A lot can be done to increase the value of a property, whereas shares are subject to market forces. When you go to sell the share, the price is not negotiable; it is whatever the market determines on the day. With property, on the other hand, a vendor can negotiate the sale to get the most for their property.

Leverage

“One of the fantastic things about real estate is you can leverage from it and create greater wealth,” says Rachel, owner of 70 properties herself. “Because banks like the low risk associated with property, they will lend up to 95%, and sometimes even 100%, against the security of a residential property, so most Australians with a steady job and a little capital or equity behind them can afford to buy investment properties.”

“You can get into property with little or no money down, using equity from other properties in your portfolio,” says Rachel. “This is a huge benefit of property investing; it allows the property investor to grow their portfolio without having to invest a great deal of their own money.” Rachel provides an example of how lucrative leveraging is for a property investor:  “Consider this scenario: I have invested $10k equity to purchase a property for $100k. Over the following ten years, based on many decades of Australia’s property market history, the property doubles in value. The property is now worth $200k, so for my $10k investment of equity, I have made an extra $100k by leveraging against my previous property investments.”

When you put money into a term deposit or savings account, it is usually post tax dollars, so they have already been devalued. Also, you are going to lose more money because you have to pay tax on interest earned. There is no leverage in cash; you cannot expect to put $10k in the Bank and accumulate interest of $100k in ten years time. You can certainly use your term deposit to buy a property; however, at the end of the day this is still your own physical money, whereas using the power of leverage to invest in property can allow you to use your equity in other properties to buy more properties. This is truly one way to ensure your investment is really working for you. The equity you put up to purchase other properties is not subject to tax like an interest savings account, and best of all it is not physical cash that you need to take from your own pocket.

Rachel makes an important distinction. “You can certainly leverage with shares,” she says. “You can get a margin loan, where you borrow against the shares you buy.” However, she cautions that because of the volatility and risk faced by the bank they generally impose certain restrictions on this type of loan. With a margin loan you generally have to buy blue chip shares and this limits your investment options. Margin loans have a loan to value ratio of around 60-70%. This means that if the market has a bad day and the value of your portfolio drops below the ratio of 60-70%, the bank has the right to sell some of your shares themselves, or demand that you personally top up the loan to bring it back within the lending ratio. Compared to shares, banks are happy to lend up to 95 – 100% of the property value with less provisions and restrictions. Only with property can you leverage your burgeoning equity to help you leapfrog into your next purchase and create more and more potential future wealth.

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