Many people swear by it as the best and safest form of investment while for others it’s too slow, requires too much money to get started, does not provide sufficient returns or it’s not liquid enough.
There’s no doubt that some of Australia’s richest people have made money in property. It’s also worth considering that whether you are a fan of property or not, it makes up a major part of our economy.
Property is used as a measure of wealth and is worthy of careful evaluation. For most people, property plays an important part in their wealth creation plan.
If you have not personally experienced major increases in property values, you probably know of people who have had major capital gains.
Think back to when your parents bought their first house. Has the value of their property increased in the meantime? Generally people tell me that they have made significant gainsespecially if they have had the property for a long time.
It’s tempting to think what’s worked in the past, will continue to work in the future. While it’s true that history often repeats itself, it’s not necessarily a good strategy to drive forwards while you are looking in the rear vision mirror.
For many people their family home is their greatest investment. Since they do not usually receive an income from their family home, the focus is on the amount of capital growth they have experienced.
As a result we tend to evaluate property investments primarily on the possible capital gains to be achieved.
You should be aware, however, that there are two very important issues that you need to evaluate whenever you consider property as an investment vehicle.
The first is cash flow or rental income and the second is capital gain. Let’s have a look at each one in more detail.
Many property investors have been induced into focusing on the potential capital gains to be achieved and often place less emphasis on the regular cash flow or rental yield achieved by their investment property.
In most cases they have no system of comparing the returns achieved by one property in comparison to another.
Rental yields may be as low as four percent and as high as 11 percent, depending upon the location of the property and the type of property.
Just stop and think: if you own a property that is returning four percent per year gross and you are paying around seven percent interest on your loan, you are losing money before you pay for property management, water and council rates, strata fees, insurance and repairs. This concept of losing money to take advantage of tax savings is called negative gearing.
The whole principle of negative gearing means that you need to lose more money than you are making in order to claim this loss against your tax so that you can receive a refund.
Do you know of a business that can consistently lose money and still stay open long term? I don’t.
When we experienced high inflation during the 80s, negative gearing worked quite well. I have serious doubts whether this is a wise strategy to follow in times of low inflation.
To protect yourself from serious losses, I suggest the strategy to take into the new century is focus on cash flow and positive returns wherever possible.
Whereas the likely cash flow can be predicted with reasonable certainty, the potential capital gain is very uncertain.
As such, I believe the serious investor should consider the capital gain component to be speculative and a bonus if it happens rather than an integral component in the planning and consideration process.
Can you really make money in real estate?
I believe that by following a prudent investment strategy, you can certainly make good money in residential real estate.
You’ll need to be very clear about your objectives and strategies to utilise your property portfolio to leverage into other investments to spread your risk and increase your returns overall.
Wealth coach Hans Jakobi is the creator of a do-it-yourself home study course called Super Secrets To Wealthâ„¢.