Why property is such a successful wealth creation vehicle

Perhaps, you like me,  have considered other investment strategies (option, shares, property or business) to invest your hard earned money into.    There are benefits and risks associated with investing in any asset class.

Personally we have found that investing in residential property has given me a great return on our investment with the least amount of risk. There are numerous books and seminars on investing in property, no money down deals, vendor finance, even if you have little or no equity, don’t own your own home and have lots of bad debt.

At a recent workshop the presenter asked “Why property is the I.D.E.A.L investment?”.    She called property the I.D.E.A.L investment because it provides:

Just about every auto/biography mentions that leverage was the critical factors to thier sucess. It is what the rich use so successfully to build their wealth and which you can also use to build your wealth.

So why is property the I.D.E.A.L investment class?

Income -Investing in property provides the opportunity to earn regular additional income through the collection of rent on the property. This additional rental income can be used to offset the monthly mortgage payments and/or expenses associated with the investment property. This along with other benefits allows us to continue applying our successful wealth creation strategies and increasing our portfolio while maintaining a comfortable lifestyle.  Like many our long term strategy is to pay down the mortgages and then use the rental income as disposable income to live off.

Depreciation – A second form of income that property investing provides is tax deductions in the form of depreciation allowances. The Australian Taxation Office allows property investors to depreciate the value of their investment properties and claim the amounts as tax deductions against the income. Higher depreciation benefits are generally obtained from newer properties however renovated older properties can also provide significant depreciation benefits. On purchasing the property you shoud obtain a depreciation schedule from registered Quality Surveyors.  If you are considering renovation ask the Quality Surveyors to also provide a scrapping schedule.  You will also need to consult your accountant on the tax deductibility of the items on the schedule.  One of our strategies includes purchasing brand new properties with high levels of depreciation so that we could use the tax benefits to sustain the investment property while it grows in value.

Equity – This is the main reason why people invest in property. Equity in this sense is defined as the dollar value that a property increases by over time.   For example, if you buy a property for $375k and over a period of time it grows in value to $475k then the difference ($100k) is simply termed equity. These equity gains are what every investor seeks as they are the cream on the icing. They can be both manufactured (enhancing the property) or just happens over the course of time.  This is one of the best ways to accelerate your wealth creation.  The increased equity can be taken out and used as deposit to purchase additional investment properties. This is basically how many of the well known and successful property investors built their portfolios.

As properties grow in value, use the equity to purchase more and more properties. Each time a property grew in value, we revalue the property and draw down the available equity to purchase the next property. Some of our properties have grown through natural growth over time, while others we manufactured the growth by up to 30% through either by repainting, renovating or extensions. Equity has given us the power to buy multiple properties in a very short time frame and grow our net wealth.  The more properties we purchase the greater the increases in our equity which in turn accelerates our capacity to purchase more properties.

Appreciation – Investment property values increase and decrease just like any other type of asset.  The main difference is that when viewed over longer periods of time, property generally always increases in value and provides low risk investing. Simply put, people need somewhere to live.

In 2008-2009, Australia had over 158,000 people come to this this great country with over 77,000 remaining as migrants.  Demograthics and social trends show that the size of our family units are reducing.  As the demand for properties is far greater than the current supply there will be an increase in property prices, the greater the requirement the greater the increase.

When looking to buy an investment property look for areas that are experiencing population growth or are expected to grow in the longer term. Population growth helps to ensure that there is demand for property and following the supply and demand principal, appreciation in property prices is highest in areas of greatest demand. Genuine property wealth comes from buying properties at the right price and allowing them to appreciate in value over time, using that appreciating value in the form of equity to repeat the process.

Leverage – is by far the most powerful feature in property investing it is the ability to multiply your efforts, to do more with less.  Simply put, it is using other people’s time and money in your favour.  Without it we would still be trying to fund our first investment property. Leverage has allowed us to to create serious portfolio and maximize what we have. Borrowing more on an investment property than what you paid for it is what leveraging is all about. You can use the banks money to grow your wealth. Property allows more borrowing capacity than any other investment class because the banks view it as low risk.  Banks will lend you up to 80% of the value of the property, more in some cases.

For example, a landlord uses 20% of his own funds to buy the investment property. They can do this by leveraging their 20% to borrowthe remaining 80% from the bank, in effect using the banks money to help him buy an asset, which will in turn make him money.   If a landlord has only put down 20% of his money to secure the purchase of the property, and the property’s capital appreciates by 10% per year, that’s a 50% return on his money per year.  The landlord uses the rent money paid to him by a tenant as leverage to help him pay off his mortgage. The landlord can use net rental losses if any, the depreciation schedule and the scrapping schedule as aleverage to offset his taxable income (seek the advise of your accountant) hence freeing some funds.

The landlord can also increase the value of his investment by improving the property. By adding an updated kitchen or building an extension to a building can (if done correctly) dramatically increase the property value and also the rental income.  The landlord can revalues the property and draws down on the equity and is in a position to purchase another rental property.  Repeating the cycle again and again and again creates wealth at an ever increasing rate, how good is that.

Why property? Put simply, you are required to put in less of your own money up front when investing in property than you would if you were investing in any other investment class. This means that you will be able grow your portfolio much quicker because you will need less of your own money than you would with other asset classes.