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All the latest news, facts and tips from the team at Pioneer Credit Connect

16
Nov 17

Why Invest In Property?

by Matthew Ikin
Why Invest In Property

Investing in property has become one of the most popular investment mediums for Australian’s over the past 50 years. Purchasing a second property can be a great way for home owners to grow their investment portfolio, especially as they have been through the process of buying a home before. In comparison, investing in the share market can have great short-term returns, but often presents a riskier investment strategy. Purchasing a brick and mortar home is a long term investment plan, rather than a quick win strategy - as much as we all love seeing money flying into our pockets, it’s just not a reality.

The benefits of investing:

The primary goal of property investing is for your financial advancement. This goes without saying. What you as a future investor need to decide is what does this advancement represent to me? Your strategy could vary anywhere from wanting steady rental income to someday fund your dream home, all the way to preparing you for an early retirement.

Property is a flexible investment, meaning that regardless of your financial aims, there will most likely be an investment strategy and property that is suited to you.  In Australia, there are two common property investing paths to choose from, rental return and capital growth. Investing for the purpose of generating rental return would require your rental income to exceed the cost of your mortgage repayments, resulting in a small return on your investment each week. These small amounts can add up over time like a savings plan, additional payments against your mortgage, or could even be put towards your next home.

If your rental income is less than your loan repayments, you will be making a loss. This may sound frightening, though this isn’t as bad as it sounds. By making a loss on your investment property you may be eligible for a tax deduction; however, what often occurs is that overtime the property will increase in value to present a potentially more lucrative return through capital growth. Both strategies have their merits whereby rental income will provide you with smaller returns over a longer period of time, while capital growth will see you make a loss whilst owning the property. Regardless of your pathway, the lump sum objective is to eventually sell your investment property when market value sufficiently exceeds the cost of purchase – also known as profit.

How to find the right investment:

The level of research you put into finding the right investment is 100% in your hands, allowing your involvement to be personal or data-driven. Personal investors tend to have a strong understanding of the local suburbs and use a combination of gut feel and advice from family and friends to make their purchase. The data-driven investors will procure data, analyze market change, and forecast the likelihood of capital returns or rental yield occurring by suburb. Decisions are then based upon historical evidence and economics in place of having ‘faith’ in their existing knowledge base or relying on their network of contacts.

Despite your natural decision making process, here are 4 key considerations that should be addressed as a part of the purchasing process:

  1. Know why you are buying
  2. Choose the right area
  3. Carefully consider the property type and tie that to your return plan – a house for equity vs. apartment for secured rental return, perhaps?
  4. Consider your tenants. Who will rent, and are they the tenants you would prefer?

Pioneer Tip: Buying an investment property shouldn’t be rushed, especially for the novice investor. Spend time looking at the market and consider what suburbs are looking to become more popular in the future. This includes digging a little deeper into data provided by CoreLogic and RP Data. Download our Super Powered Property Investment Guide to get a head start.

Property investing in the past:

Property investment has been regarded as the safer investment path to take given that over a longer period of time, houses traditionally climb in value. For example, in 2002 the average house price in WA was around $190,000. Move forward 15 years and that same house is worth around $530,000, rising 178%, according to REIWA. Imagine investing in a $500,000 property now. What would your property be worth by 2032.

Historic WA House Prices

The graph above shows how rapidly the average house price can rise. In WA alone, there was a 147% increase in property values between 2002 and 2007. The main driver of this was a boom in the resources industry, where higher average household income coupled with increased housing demand, caused by the relocation of interstate residents to WA, caused the price of property to increase.

Learn more:

When it comes to property investing, this isn’t our first rodeo. We love seeing Australians get ahead with their finances so much that we wrote an entire eBook on this topic. To learn more about property investing, see our Super Powered Property Investment Guide!