Why residential Australian property as your foundational properties?
Why residential Australian property as your foundational properties?
When looking to build a property portfolio, one of the first things you might ask yourself is.. What should I purchase? Should I purchase a residential or commercial property? Should I purchase an Airbnb short term rental?
Everyone has an opinion and everyone has their own strategies and way of doing things. Some people have higher risk tolerances than others. Some prioritize cashflow over capital growth and vice versa.
Today we are going to talk about residential Australian property and why residential property is a great low risk option to start your foundational portfolio.
According to billionaire Andrew Carnegie, 90% of all millionaires achieved becoming a millionaire through investing in real estate.
Majority of Australian’s Wealth is held in Residential Property
With majority of Australian’s wealth held in property, and the big 4 banks making majority of their profits from lending money to borrowers purchasing residential property, it is far more resilient and less volatile than commercial, industrial property. Don’t get me wrong, there will be corrections and stagnations when you hold a property for the long term.
This is where your mindset is crucial, understanding it’s a long-term game and that the combined capital cities as per Core Logic have increased 453.1% over the last 30 years. As soon as you have this long-term approach it’s an absolute no brainer, right?
Residential Property is lower risk!
When starting out in property 95% of people want to take a low risk approach. Residential property is always going to be in demand with humans living on this planet. In Australia, with a growing population, and not enough property being built this means property is scarce, therefore you have low vacancy periods with less time that you don’t have rental income coming in.
We can look at the major banks within Australia to understand this risk. They are happy to leverage up to 90% to 95% of the value of residential property. This is factoring in their risk profile, they understand that long term residential property increases.
Whereas to purchase a commercial property, for example, you may need a deposit of around 20-40%. This is factoring in the bank’s risk profile again, as they understand that commercial property is higher risk. From both a capital growth and rental perspective. How would you deal with having a property sitting there vacant for 1 month? 3 months? 6 months or a year? This can happen when purchasing a commercial property.
Residential Property is less volatile!
Property markets correct, this is a natural part of the cycle. Always has, and always will be. It’s not possible for a market to constantly be on the up, peaks and troughs are natural and you must understand this. To be a sophisticated investor you MUST understand this, this will ensure you stick around and not freak out and off load a property. Long term buy and hold is extremely important.
Property isn’t like shares where once there is negative sentiment you can just pull that asset and sell it straight away. Selling a property is a long process, you might invite a couple of selling agents to complete an appraisal, decide on an agent to sell your property. This typically includes marketing the property, completing open homes, signing a contract and then settlement typically takes around 6 weeks.
This whole process can take months and because of that you don’t have a massive amount of people exiting all at once.
Residential Property is a necessity.
As long as there are humans on earth, residential property will be a must. Everyone needs somewhere to live, and that means there will always be demand for residential property.
With massive amounts of overseas migration to Australia, and construction costs not keeping up to the requirement, land will become scarcer. Higher demand, lower supply and this leads to one thing and one thing only. Growth!
Growth is performance! As an investor, performance is freedom, working less each week and retiring earlier!
Residential Australian property is the initial pillars to build your portfolio. Once you build up a substantial residential portfolio you can diversify into additional assets with higher risk.
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