March 30, 2014
Yew Kong Lye
Investing in real estate requires courage and commitment. Knowledge surrounding how to invest in property is in abundance and readily available. I have contributed to the ‘How’ like my articles on how to locate your investment property, etc. and there’s more information on the subject than you know what to do with.
Very often it is not the ‘How’ but the ‘Why’ that separates the man from the boys, the achievers from the wannabes. Before we even understand the reasons to why we invest in real estate, we should question our big ‘WHY’ behind the reason for investing. When we find a big enough 'why' the 'how' comes easy. When someone wants to build wealth and has a big ‘WHY’ like, he wants he wants to help eradicate a disease, you can bet that his chance of success is so much greater than someone who just wants money for status and power. Once we’ve discovered our big ‘WHY’, then we can talk about the reasons behind why invest in real estate. You may think that I'm bias being involved in real estate by way of finance but, I intend to demonstrate why investing in real estate really make a lot of sense for the all the following reasons.
EASY TO LEARN
Learning how to invest in real estate is easy compared to shares, art or rare coins. There are not too many difficult concepts in property like you have in shares, like PE ratios; market capitalisation; small cap, debt cover, etc. It’s amazing what you can pick up just by reading a few books and attending some seminars for some knowledge on investing in properties.
Property operates in an imperfect market. That is to say, at the point of purchase it could be worth anything. It could be worth less then what you’ve paid which means, you’ve bought a lemon. This happens all the time when people fall in love with a property and get carried away at an auction and pay way over the market value. Or, you could pay way below the market value which means you’ve got yourself a bargain. This happens every week-end and if you hunt enough you’ll find a bargain e.g. a group of siblings are tired of fighting over an inherited property and can’t wait to get rid of it at any price. Or, a purchase could be right on the market where every bidder has done his/her homework and is not emotional.
Contrast this with the price of share at the point of purchase. It is exactly the price as determined by the stock market. When an investment operates in an imperfect market, the opportunity to make huge gains is possible with some astute shopping. However, the reverse is also true.
EASY TO ADD VALUE
Sometimes all it needs is a lick of paint and tidying up the front to add valued to a tired property that you have recently purchased. I know of a property that was purchased and had very basic renovation done to it and had increased in value in a very short time.
The owners gave it a lick of paint inside and out, polished the beautiful floor boards (hidden under some flowery 60s carpets), replaced the 60s light fittings with down lights and a new bathroom. They didn’t spend more than $10,000 and guess how much value was added to the property in a short month when the valuers were called in? A whopping $50,000, an increase of more than 25% on their investment. Not only did the owners increase the value of their investment property, they also increased their rental return by more than 25%. It’s not that difficult to add value to a property, is it?
If you own some BHP Billiton shares, try walking into the office of Andrew MacKenzie (if you can get that far) and tell him that you have a great idea for him. Suggest that you think it’s a brilliant idea for the company to invest in the latest earth moving machines to increase your earnings per share. I would be interested to see what his response would be!
When you have invested in real estate on your own and not through a property trust, you have total control. If you feel like painting your property (except when a body corporate is involved) black if you think it will bring in more rent, nobody can tell you otherwise. You are free to make all the decisions about the property and whom you would like to rent it to.
BANKS LOVE REAL ESTATE
For this simple reason it is the preferred asset class for investment. Banks do risk assessments on all the loans that they hand out and deem that real estate is one of the safest securities to lend against. The low risk nature of property is the reason behind why banks lend to a high ratio of the value of the property. They can go as high as 95% and it used to be 100% pre GFC days. When the banks freely lend for property purchases and at such high ratios, the message is: “It’s a relatively safe investment as far as we’re concerned and we are happy to lend you money for it”.
The banks don’t like shares as much and that’s why they only lend 50% on the value of the shares with their margin loans. To add insult to injury, they will subject you to margin calls (reduce your loan) when your shares fall below certain level which they are not comfortable with. No such thing with property.
EASY TO FINANCE
So long as you have an income and some savings or equity, the banks will lend you money to invest in real estate and they will lend you up to 95%. They make it easy for you to qualify by considering the potential rental income as part of your income in their assessment process. An investment is only as good as the finance that you are able to raise for it.
NO CLOSE MONITORING.
If your intention is to buy and hold on to your property investment, there is no need to monitor and watch over it like a hawk like you do for shares. Property prices tend to increase evenly and consistently over time and do not need monitoring. The fluctuations of any one property relative to the median price are very low.
EXCEPTIONAL TAX BENEFITS
Australia is amongst the very few countries in the world that offers exceptional tax benefits for owning an investment property. Essentially, it boils down to paying less tax just because you own an investment property. In certain situations, your tax and the tenant can wholly fund your investment. Just for this reason, you should sit down with a financial planner and find out exactly how it works.
Owning investment properties make a lot of financial sense and if you’re not doing it, especially if you have the capacity to, then you may be ripping yourself off. It is easier than you think and the best thing is that you don’t even have to sell your investment property to reap the benefits of any growth. To find out how that can be done, call me on 0423 871 888