The sooner that you start to think about the bigger picture, the sooner you can make the decision to start planning for the later part of your life.
History shows that the vast majority of millionaires have made their fortunes through property investment. In fact, 86% of the world’s millionaires hold their wealth in property. These include well known people like Donald Trump and Robert Kiyosaki, as well as a high percentage of the Rich 200 in BRW list. It’s simple. When you have sufficient equity you can borrow the money you need to invest in property. Your repayments can be made by tenants and as an extra bonus the Federal Government provides tax concessions to property investors.
There Are Five Top Reasons for Investing in Property:
- Rental income from tenants that pays off the property
- Increased capital value in the land over time
- Attractive tax benefits on the depreciation of the physical house4
- Security of ownership as compared to renting5
- A growing asset base for retirement
If you have 7 to 10 years to work with, a well-positioned affordable investment property portfolio can give you the financial independence and freedom that many of us need for retirement. For generations, Australians have trusted ‘bricks and mortar’ as the most dependable and profitable investment strategy.
This is because property doubles in value every 7 – 10 years:
- Since 1929 property has, on average, increased by 10.8% per annum compound growth, with much higher returns in certain regions.
- Median priced property in Australia has achieved an excellent growth rate, higher than inflation, making it a very solid investment.
- Historically, the figures show that the average property value doubles every seven to ten years. Of course, returns vary according to the market, location and type of property, but carefully chosen properties can offer better returns than other forms of investment.
- Recent reports from the Australian Stock Exchange shows that the property market had out performed shares over the last 10 and 20 year periods. It found that, between 1994 and 2003, residential property investments generated an after-tax return of between 11.4 per cent and 9.3 per cent, depending on investors’ marginal tax rates.
Understanding the property cycle when buying
The Property Cycle
The property market moves in cycles. Property values may rise due to strong market growth, remain steady or even decline during certain phases of the cycle. Thus, as an investor it is important to know where the market is within the cycle to ensure you secure your property at the right price.
As is depicted in the graph, at different stages of the cycle, property values may increase, remain steady or decrease, however ultimately, the value of property increases over time.
Property Cycle Phases
At different stages of the property cycle, property values will exceed the long term trend (i.e. in boom times) and at other stages will fall short of the long term trend (i.e. property slumps). This is because the property cycle passes through four phases:
The Boom Phase
The boom phase tends to be the shortest in the cycle, during which property prices increase at a rapid rate. This phase generally begins slowly as investors recognise that property returns such as rental payments and property prices are increasing. As a result of the boom, properties often sell for more than their asking price, as buyers continue to compete with each other and vendors continue to push up asking prices.
As the boom continues, many try to get on board to make the most of the current stage of the cycle; new investors join the market and builders, developers and existing home owners flood the market with properties. This leads to excess supply, which eventually brings the boom phase to an end and creates the consequent phase.
The Slump Phase
The slump phase occurs as a result of an oversupply of property due to the activity of builders / developers and sellers in the boom phase. With more investment properties on the market, vacancy rates increase and rental returns begin to decrease. During the slump phase, property prices stop growing and in some cases, may even decline. During this stage, many new home buyers also find themselves in trouble as they struggle with repayments. This is because many buyers over commit themselves in the boom phase, by purchasing properties they could not afford and interest rate rises make it difficult for repayments to be made. Therefore, the only way to relieve this financial stress is to sell – in most cases at depressed prices.
The Stabilisation Phase
The property market does not usually jump from a negative period to the next upturn. Generally, a short phase exists in which various economic factors catch up with each other and stabilisation in the market occurs.
The Upturn Phase
The upturn phase sees vacancy rates slowly fall, rents start to rise and property values start to increase creating investment opportunities.
Property values generally start increasing in the inner suburbs, or those close to the beach first and then move out to the middle ring of suburbs and eventually to the outer suburbs.
By the middle of the upturn phase, property is generally affordable and returns from property investment are favourable. Property values will generally slowly increase and peak in the boom phase of the cycle. The attractive market results in interest from investors and first home buyers, and pushes the market towards the next boom phase; therefore starting the cycle again.