Creating personal wealth through property investing is an ambition for many Australians. However, when people talk about investing in real estate, they often assume their return will depend solely on whether the value of the house goes up or down [capital growth]. In fact, many believe it’s hard to make significant profits in real estate as the appreciation on property is not evident every year, and may take five to ten years to recognise substantial growth depending where we are in the growth cycle.
While that may be true for your main residence, there are additional benefits from owning real estate as an investor rather than a home owner. Real estate is arguably the easiest asset class to build sustainable wealth and financial freedom. Lenders view real estate differently to other asset classes: The deposit is less, if at any point the value of the property decreases, the lender does not margin call [ask you to put in more money], and when properties increase in value they can be used as security against the purchase of additional properties.
Take a look at this example from Ventura ID – A Tale of Two Perth Investors.
Becoming financially independent is the result of a well-executed investment plan that’s more based on being diligent that being super savvy. The key to investing in real estate is to have a clear strategy in your head, not your heart. Having somebody explain how your tax benefits and your tenant become your investment partners is the key to taking control and attaining your desired financial goals.
When considering an investment property, here are a few points to think about:
Although location, location, location, is the catchphrase for many real-estate shows – and most certainly is important, it is not everything. History has demonstrated that all properties go up over time, and even a poor performing investment property 20 years ago would be considered an absolute bargain today if you could buy it for the same price. [Hint], time is your best friend so long as you have regular tenants, you can service the loan, you do not sell, and decades of property growth history remain consistent.
Rent less outgoings [mortgage payments, letting fees, maintenance and rates], makes you either positive or negatively cash flow positive. Over time rent will increase and eventually the investment will be cash flow positive, however in the early stages of the investment cycle you may need to contribute some money each week.
Your negative annual cash flow total, along with the depreciation of the building, and any other associated costs are collectively known as negative gearing. At the time of writing this paper, The Australian Taxation Department allows this total to offset other incomes in the same name of the investment property. Simply put, the offset becomes a tax deduction and ultimately minimises the amount of tax payable.
Building an investment portfolio is an exciting process and having an experienced team work with you can take a lot of the risk and uncertainty out of the project.
Ventura iD and Multi Living Developments offer a free consultation service so you can see if developing is an option for you. Call (08) 9241 1600.