Property investment is one of several choices that an investor can make when working on saving and investing, to build their asset base and become wealthy.
Investors today are greeted by a range of investment choices and investment products. When analysed as groups assets can be simplified into cash, fixed interest products like term deposits and bonds, and stocks / equities and real estate.
Property investment is therefore one of the core ways of building wealth.
One of the factors that investors should consider when choosing investments is that of leverage. Leverage refers to the amount of money you can borrow using an asset as security.
Compared with other asset classes residential property is easily borrowed against.
It is frequently the case that the purchaser of a property will borrow 80% of the cost of a home, and put down a 20% deposit. This position of holding only 20 percent equity means the investment earn a return on say $500,000 rather than a return on $100,000 being the a 20% deposit. As values rise that means a $500,000 home that grows by 10% is now worth $550,000, this represents a 50% return on the investors original $100,000 deposit.
Other assets such as shares are not as easily borrowed against, and if you could borrow 80% of the value of a share portfolio, the interest costs would be higher. Money borrowed to buy investment properties or homes is the cheapest form of bank borrowing.
Investment property has two forms of returns, the first being rental income from the properties tenants. The second is capital growth, which is the difference between what something is sold for and the price you paid for it. One of the benefits of capital gains is that unless you are a forced seller of a property, you can choose when to sell, and therefore when you make a capital gain.
Houses and property are illiquid assets, meaning that unlike cash which can be used instantly, or shares, which can easily be sold for cash in a matter of days, real estate can take time to sell. What this does mean is that unlike other assets investors are less likely to frequently buy and sell in quick succession, this leads to holding long term and being able to capture long term increases in prices, without succumbing to short term fashions.
investors in property, just like home owners are frequently motivated to pay off a loan, this desire to reduce debt leads to ‘good’ behaviours like regular savings, which without the debt, money might be spent on lifestyle.
Summarising
- Property tends to be stable in value, changes are less frequent than liquid assets like shares
- Stable values means borrowing to buy property is easier than other asset classes.
- Long term investment can help you benefit from capital gains, which are a vital part of total investment
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