By Rich Harvey, CEO & Founder, propertybuyer.com.au
In these tumultuous economic times, it can be difficult knowing which way to turn when it comes to financial decisions.
Money in the bank continues to stagnate with lousily low interest rates on term deposits despite recent increases announced by the RBA.
Share investments have been a rollercoaster of anxiety too. Good news delivers soaring highs, only for the announcement of some lousy economic metric to cause ASX indexes to plummet.
Even real estate has proved a tough short-term trial for many, especially those who may have overextended their borrowing capacity at the end of last year and are now dealing with higher repayments.
But the key to investment is about having a long-term perspective – and there’s no doubt under that criterion, property comes up trumps.
Why property?
So, why does property deliver the best option for investors?
Primarily because history shows it’s a long-term proposition where consistency and commitment pay exceptional low risk returns.
If you secure the right kind of asset as soon as your finances allow, and can comfortably commit a certain amount of your available income toward holding that investment, then time in the market will reward you handsomely.
While real estate values are subject to short-term market fluctuations, those swings and roundabouts tend to be less dramatic than with other asset classes. Stocks and shares rise and fall in an extraordinary fashion and don’t get me started on things like crypto!
Yet ask any long-term property market investor and they’ll tell you that assets with the right fundamentals are long-term winners. If you hold your investment for at least one to three property cycles, the net result will be excellent.
I’ve also been asked whether people should pay down their home loan before investing. Clearing your home loan is a great idea but it isn’t always the most prudent choice on where to assign excess funds. Yes, I think you should have a manageable home loan commitment. However, it’s also important to think about the opportunity cost of devoting all your efforts toward paying down the home verses investing in a great property asset.
If you can dedicate some of your income toward a property investment delivering the right mix of rent and capital gains potential, then it can be worthwhile locking in that investment while still servicing a home loan.
The main problem with waiting to invest in property until you pay off your home loan is that this typically happens in your 50’s, which means that you have much less time to get the major benefit of capital growth. Let’s say you start buying your first home at age 25, then you are forfeiting at least 2 and half property cycles of solid growth. With careful planning and budgeting it is possible to pay off a home loan AND buy an investment property.
When should I invest?
So, if property delivers excellent long-term upsides, when is the ideal time to invest?
The answer lays in understanding your personal circumstances and stage of life.
Young singles and families often focus their finances on saving for a home deposit, which I applaud. Owning a home and paying down the loan not only keeps you and yours away from the ever-tightening rental market, it also provides an increasing foundation of equity. The inevitable long-term increase in your home’s value, tied in with your regularly repayments, delivers a growing cache of wealth to be utilised in the future.
The one piece of advice I would add here is to think about the long-term plans for that first purchase. Most homebuyers will look to upgrade as their family grows. So, think ahead and consider perhaps buying a home that could be easily turned into an investment one day.
Of course, if you are past this first homeowner stage, you should definitely be parking excess funds in an investment that will maximise your returns and boost your personal wealth.
The first thing you should do is look at your available resources, determine some achievable future goals and map out a path to building your wealth.
Work out (perhaps with the help of a qualified financial advisor or mortgage broker) what income you have left over each month after paying essential outgoings such as mortgage, groceries, utilities and other costs.
This excess amount will be a commitment toward your goals.
With this in hand, again consult with your advisors to determine what property types, locations and price points will deliver the necessary rental income and capital gains to suit your plan. Choosing the right asset takes you toward your ultimate goal in a stress-free way.
This is where your buyers’ advocate comes to the fore. Securing the ideal asset for your investment strategy is where we shine. Relying on a professional with the skills to unearth and negotiate on your behalf not only removes the anxiety and mitigates the risks, it also help you retire in a healthy financial position far sooner than you imagine.
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