Why invest in property?
The main reasons you should invest in Australian residential property!
In 2021 there are so many different types of assets classes to invest in. The most common that you hear about are stocks or shares, commercial property, residential property and cryptocurrency. Under each individual asset class there is then a multitude of different types of assets within each asset class that you can invest into.
When investing and looking to set up your foundation to build wealth, it’s effective to dial in and focus on one asset class and get it right. Then once you have built up substantial wealth in one asset class you can then look to diversify and dabble into other asset classes. This is completely your choice as to what asset type you decide on.
As a Buyer’s Agent for Residential Australian property, we truly believe that residential Australian property is a great asset class to invest in to build your foundational wealth. Many millionaires today built their foundational wealth through property. Today I want to discuss some of the main reasons why we invest in Residential Australian property.
Residential Property is a necessity
Property, and more specifically land, has been a desired asset class for many centuries. While human beings are still on earth, property is going to be a necessary asset class, as everyone needs somewhere to live. If you focus on large capital cities, where most of the population will move from interstate migration or naturally grow over time in addition to large infrastructure spending, this will result in strong demand due to the increased population met with the same level of supply for existing property. Buying in existing established areas ensures that over time the same level of supply occurs, however with the increase in population or demand results in scarcity, and scarcity ultimately results in growth. We’ll discuss existing property vs new property in a future blog in a huge amount of depth which will be extremely valuable.
Leverage other people’s money
Banks identify property as a less risky asset class due to this being less volatile. We know this because they are happy to lend money sometimes up to 100% of the residential property price, in most cases now, the highest they are willing to loan is 95% also known as the ‘loan to valuation ratio’ or LVR. The loan to valuation ratio is the loan amount in comparison to the valuation amount of the property. For example, a $500,000 property value with a loan of $400,000, would have a loan to valuation ratio of 80%.
This means we can save up 5% or 10% plus the purchasing costs, and then use other people’s money (the banks) to purchase an asset class that we would not have been able to afford otherwise. This then means that we are leveraging into a larger asset base and that our returns as a $ amount will be more significant, and we can grow our wealth at a faster rate. 10% of $500,000 is going to have a higher return then 10% of $100,000.
Less volatile and less risky asset class
Property is one of the less volatile asset classes unlike that of stocks/shares/crypto. This is because unlike stocks/shares/crypto they can’t be sold off extremely quickly to get rid of them. If the confidence in the economy or property market goes backwards all property owners can’t rush out and sell their property straight away. You must reach out and contact a selling agent, they must appraise the property, put a plan in place for the marketing of the property, list the property and hold open houses to sell the property. This process typically takes a couple of months. Due to this it helps the property asset class as it becomes less volatile and solidifies that it is less risky.
Manufacturing of Equity
If you are a savvy active property investor you may be able to complete a strong due diligence and feasibility on a property. This would be to determine if you can complete a cosmetic renovation or extend and add additional bedrooms or bathrooms. If you do this correctly for every $1 you invest, you want to be able to make $2 or $3 back. Therefore, instead of waiting around for prices to move up you are taking things into your own hands to build equity in the property sooner. Not to mention this will also help increase the rental income you would receive. This isn’t for everyone, if you’re just starting out you may not wish to do this, however, in the future may be something you look to consider.
Australian Economy depends on property
In Australia our economy influences the performance of the property market. When interest rates are lowered, we find more consumers have increased borrowing capacity and go out and spend more on property, increasing property prices. You will also find that during the current Covid-19 pandemic, there is a huge amount of Government stimulus to keep the economy ticking along, this stimulus will always end up back in assets and more specifically land prices. We also have APRA the Australian Prudential Regulation Authority. They are an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia. An example of this is when APRA stepped in back in 2014 and put restrictions on the interest only lending. This was in response to an environment of heightened risk, a reflection of heightened house prices, high and rising household indebtedness, subdued household income growth, low interest rates and strong competitive pressures.
I trust that you have gained some value from reading this blog today. I hope that this gives you a better understanding of property as an asset class. If you have any questions or want to have a discussion around the information provided, please reach out at info@tayloredpropertywealth.com.au.
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