Property is a Top Performing Asset. Australia has created 85% more millionaires over the past ten years. How did all of them achieve financial success? For most of them, it’s through property investment.
Why is Property Investment So Attractive?
It’s a Low-Risk Investment
Banks recognise that residential property produces consistently high capital growth every year. Australian residential property investment averaged 8% in gross returns per annum over 10 years to December 2017 according to the ASX/Russell Investments 2018 Long-term Investing Report. The Report indicates that for the 20 years to December 2017, residential property was the top performing asset class. This is fuelled by our strong population growth and demand for housing.
Property prices can drop. Property price drops are not really losses – unless you sell. If you have invested wisely, price drops can be sustained with rent generation until property prices rise again. It is also worth remembering that rent and tax deductions can cover costs and interest on your loan but if there is ever a shortfall or other extra costs, you can leverage the equity on your property to help defray costs. You can also leverage equity to help purchase more property to grow your portfolio.
Over time, property provides you with an income that grows to eventually cover your costs and generate more income. With capital growth historically averaging between 2% and 4% over inflation, even if inflation is low, property performs higher than inflation.
Property Investment is Relatively Easy to Understand
Besides having a healthy track record, property investment is relatively easy to understand. Do you understand these terms: Credit Default Swaps, Collateralized Debt Obligations, Hedge Funds, Air Pocket Stock? Books have been written to help investors merely understand stock market terminology! With property investment, keeping it simple means less time getting your head around the language and not relying heavily on others to decode it for you!
Government and Tax Incentives Support Investors
Introducing Susan Smart. She has just bought her first home off the plan for $350,000. She received a $15,000 First Home Owners Grant and a stamp duty exemption of around $13,000.
She lived on the property for a year. Then she moved to a share house, rented out her property while claiming negative gearing benefits. During the next few years, she used her savings and equity to purchase another investment property.
If she sells the first property, as long as she has rented it for six years, the government still treats it as her main residence as long as she does not purchase another property to live in in the interim. Now she should be able to avoid paying capital gains tax while receiving rent and claiming negative gearing benefits.
How does negative gearing work?
Going back to Susan, she will have ongoing costs on her property like maintenance, management fees, bank fees, interest payments and insurance.
Her properties will also begin to depreciate over time – carpets wear out, curtains fade, fixtures break. These costs and the interest paid on the loan can be offset against her assessable, taxable income. Also, the costs of upgrading can be claimed at a much higher rate on a new property.
Homeowners with a high income and homes almost paid off can also benefit from negatively gearing an investment property. By borrowing as large a proportion as possible of the cost of the home, owners can maximise their negative gearing, save on stamp duty if it’s a new home and declare on depreciation – which will be higher than their first home. They can then also hopefully reduce the interest on the loan of their first home, as well as claim a tax deduction immediately without waiting until filing an end of the year tax return.
Government incentives can help to make property investment an extremely attractive option.
Property Investment Can Help You Become Mortgage-Free Earlier
Purchasing a home usually means paying a mortgage for decades to come. By investing in property, homeowners can increase their property portfolio and decrease the years they need to pay off their home, with the ongoing financial stresses this entails.
If Susan Smart uses the equity in her home to invest in more properties, in say five years her home will have hopefully increased in value, her properties will probably also have increased in value and she can use the equity to pay off more on her home loan.
If she sells some of her investment properties, she may be closer to paying off the debt on her home – or if she invested wisely, pay it off completely – and still grow her portfolio of properties.
It will Secure Your Financial Future
Now meet Bob and Sue Sing. They were keen to invest in multiple properties to create more streams of income and likely achieve long-term security.
They purchased three investment properties over the course of five years. Jumping ahead eight years, some properties had done better than others, having acquired varying degrees of equity.
The couple received advice and had a solid plan on which properties to sell. From the increased equity on the sale of those properties, they paid off the balance owed on their remaining properties. They now live on the income generated from these remaining investment properties. They had time, wise counsel and a clear plan of action.
Property Investment Can Help Build Wealth For Retirement
In 1975 one in ten thousand people were aged over 100. By 2054 one in one thousand people will be over 100. By 2054 Australians aged over 65 will, for the first time in history, outnumber children under 5 years old. You can imagine the strain this puts on the Age Pension with fewer taxpayers to support retirees.
The Age Pension for each member of a couple, per fortnight from 20 September 2018 to 20 March 2018 is $684.10 ($32,836.80 per annum). To enjoy a “comfortable” lifestyle in retirement of say 20 years, a couple would need about $58,000 per annum. The pension falls well short of this.
The average cost of a room in a residential care facility is $400,000 in a metropolitan or major regional area.
With the average superannuation balance at retirement being $200,000 for men and $100,000 for women, even supplementing this with the Age Pension does not allow for a secure retirement.
Reaching your financial goals and securing your future in retirement takes time and strategic planning. A steady stream of funds from rental properties can certainly help achieve this.
To help you on your way now – contact us for an obligation free chat. We can give you the tools that will help towards a secure future for you and your family.
Contact our team on 1300 550 605.