During the property boom of 2020-21 many investors focused on the short-term gains they could make from investing in property.
Now that we’re almost through the downturn stage of this property cycle and our property markets are about to reset and a new cycle will commence, it’s the perfect time to reflect on some of the longer-term benefits you can hope for when you decide to become a property investor, especially if you are looking to secure your financial future.
These include, but are in no way limited to, the following…
1. It’s the safest wealth creation vehicle for everyday Australians
Bricks and mortar enable everyday Aussies, “mum and dad investors”, to build their wealth with minimal risk.
Over the decades, property values have risen pretty consistently across the country, and unlike many other investment products, the property gives you a huge amount of control over your assets.
You can insure it, improve on it, and the options you wish to sell are numerous – renovate and “flip”, subdivide, knockdown, and rebuild, to name a few.
You’re probably already investing in the share market with your superannuation fund, so investing in property is an opportunity to diversify and avoid putting all your eggs into one proverbial basket.
This gives you better growth prospects and protects you in times of economic trouble, providing the security we all crave.
2. You can hedge your bets against inflation
Inflation is unlikely to go anywhere any time soon.
Sure inflation is coming under control but it’s important to remember that the government likes mild inflation.
The government and the Reserve Bank create inflation on purpose by manipulating various variables to try to keep the inflation rate between 2 to 3%.
For a number of years, they undershot the mark, and now it seems inflation will remain higher than that for a number of years.
Unfortunately one of the sticking points in our economy at the moment is the idea of wage stagnation – that as the cost of living continues to go up, wages are lagging behind, leaving many everyday Aussies with less spare cash after they’ve paid their bills.
Investing in property protects you against this phenomenon because house prices and rents tend to rise along with, or in excess of, inflation.
That means as bread and milk become more expensive, so too does the asking rent on your investment property – even if your wages haven’t budged.
Your increased living expenses are covered, so you won’t be counting your coins at the checkout hoping you have enough to cover the essentials.
Not to mention, you’ve got a concrete asset that you always have the option of selling, should you need access to a large amount of cash.
3. Inflation is eroding your mortgage
While inflation increases the value of hard assets like property, it means the value of your mortgage becomes less.
Over the medium to long-term, it is likely that the growth in the value of your investment property will outstrip inflation.
Imagine you by any investment property for $700,000 and have a $500,000 mortgage against it.
At some stage, your property will be worth $1 million (don’t worry about the exact timing of this) and your mortgage will still be $500,000 – but the dollar won’t be worth as much in the future.
Even if it’s negatively geared, so you don’t see a cent of the rental income, and you never pay a dollar off the principal, you still owe only the original amount.
You now have half a million dollars in equity meaning you could borrow against it to fund your next purchase or sell and live off the proceeds, it’s up to you.
4. It offers you 4 ways to make a profit
When you commit to investing in property as a long-term strategy, you’re actually gaining access to a number of ways to boost your bottom line.
- Of course, there is the capital growth – how much the property will appreciate in value over time. This alone is a big money-spinner for long-term investors. While short-term market fluctuations affect investors who buy and sell properties rapidly, those who plan on holding their portfolio for many years are virtually guaranteed good capital growth.
- In addition to the growth which the market affords you, there’s the manufacturing growth you can expect when you do improvements and renovations. This forced appreciation not only boosts the value of your investment property, but it could also improve your equity position and enable you to grow your portfolio faster.
- Then, there’s the rental income. This will vary depending on the property type, area, and local rental market, but at the very least it should go a long way towards covering the interest payable on your loan, if not return you a profit in the hand.
- Another lucrative aspect of property investment is the availability of tax benefits. By capitalizing on the available tax incentives, property investors can reduce their income tax obligations while simultaneously increasing their wealth.
