12 Pros and Cons of Investing In Property
There are pros and cons to investing in property in Australia and it is important for you to weigh up the benefits and the risks before making a purchasing decision. The more educated you are about investing in property the lower your risk will be. In this article I will outline 5 pros and 7 cons to investing in property and will then direct you along a path so you will know exactly whether property is for you or not.
5 Pros of Investing In Property
1. It is a stable investment
Over time property has proven to be a very stable investment when compared to some other markets. Yes, it has its ups and downs but the property market as a whole tends to be a lot less volatile than other investments such as the stock market. This may be due to the fact that property takes a longer time to sell (and shares can be sold in a second) and the fact that property is almost always in demand. In Australia it is a well known fact that population growth is outstripping supply and we can’t develop housing fast enough.
Many investment guru’s have shown that property prices in Australia tend to DOUBLE every 7-10 years. I have certainly seen this in my own lifetime. A property that was worth just over $100,000 in the 1980’s is now selling for close to $1,000,000 in 2013.
2. You can leverage your investment
Being able to leverage your investment means you can purchase more with less. With property this happens when you put down a deposit on the property and the bank loans you the rest. Instead of taking $60,000 and investing it in the stock market, you can take your $60,000 with the bank’s money and purchase a $300,000 house.
Leverage helps to maximise your return on investment when you experience growth. A 10% return on $60,000 in the stock market gives you $6,000. A 10% return on that $300,000 house, with the $60,000 deposit, gives you $30,000 return on investment…that is a 50% cash on cash return. Much higher because of the leverage you have.
NOTE: How many banks do you know who would lend you up to 95% of the value of your stocks? This speaks volumes about how banks see the security of property versus the security of shares and other investments.
3. It can generate positive cash flow for you
One of the pros of owning an investment property is that you can rent it out. If you can get enough rent to cover your expenses you are effectively getting someone else to buy the property for you.
You put down the deposit and the people renting the property pay for the mortgage and the expenses. If you are smart you will even have some money left over which is positive cash flow and passive income. Over time as you pay off your mortgage you gain even more positive cash flow.
With enough time and enough properties this cash flow can eventually fund your lifestyle and you could even quit your job completely.
4. Property can offer tax benefits
Property is great when it comes to tax benefits. There are many tax benefits you can claim. If you are losing money on your investment property (this is called negative gearing) you can offset this against your income and thus secure yourself a tax saving. You can also claim things like depreciation on fittings and fixtures which amplifies your tax savings. In many cases you can even claim a visit or two per year to inspect your property and accommodation while you are doing the inspections.
5. Long term investment (with potential financial freedom)
Many people love property as an investment because it can be a great long term investment. They aren’t making any more land, so by securing your parcel of land today you can reap the benefits of it in the future.
With the progression of inflation (which is the devaluation of money) over time your property is likely to go up in dollar value, rents are likely to go up to, given you invest in the right area. This means that over time your cash flow improves as you are collecting more rent and as your mortgage decreases or stays the same.
This positive cash flow can then be used to fund more investment properties or to fund your lifestyle. I recently read of a retired lady who owned just 2 investment properties and they were funding her lifestyle far above what the pension would ever provide for her.
7 Cons of Investing In Property
Property investment is not all rainbows and lollipops, there are some cons associated with investing in property also.
1. It is not very liquid
Shares you can sell at a moments notice, property takes longer to sell. Depending on the area it could take weeks or even months to sell your property. This lack of liquidity can be a con if you need to access your money quickly for use in other areas of your life.
2. There can be hidden problems associated with property
You can do your homework – get a building and pest inspection, ensure your property is kept to the highest standards, scrutinise the rental application and more – but there are always going to be some hidden problems associated with property. Very rarely will you buy a property and put it into complete ‘set and forget’ mode. There will always be something to fix, a rent payment to chase up on, an unexpected bill.
That’s why everyone doesn’t do it. Get good at managing your risk and protecting yourself against these hidden problems.
3. Property has a high entry cost
Shares you can buy into for as little as $500. Silver you can invest in for as little as $20. Property is going to cost you thousands and thousands of dollars just to get into the market.
With property prices constantly on the rise it continually gets harder and harder to get into the market. This high entry costs keeps a lot of investors out and makes it hard to begin investing if you don’t have a lot of money behind you.
4. Changes (eg. vacancies, interest rates) can put huge strains on your cash flow
Because property is such a large investment you will often have a mortgage you have to pay for. Sudden changes like rental vacancies or rising interest rates can put a huge strain on your cash flow. If you are relying on the $300/week that comes in from your tenant and all of a sudden they move out or stop paying can you afford to continue to make your repayments?
5. You could have all your eggs in one basket
Because of the high entry fee it is common for investors to have all their eggs in one basket. This lack of diversity opens you up to devastation if the market changes suddenly or your investment does not perform the way you would have expected.
There are two ways to combat this
a) Diversify – Try to have a rich mixture of investments – eg. Property, Shares, Commodities, Business etc
b) Specialise – Get really good at investing in property by growing your skills. The more skilled you are the lower your risk will be and the higher your potential return on investment.
6. Bad tenants can be a nightmare
Not only can bad tenants affect your cash flow if they don’t pay their rent but they can also be a real nightmare at times. The stress of bad tenants can be intense and they can cause emotional stress as well as financial stress. Again, property is not always a set and forget investment, sometimes it takes hard work and yes…a little bit of stress.
7. Ongoing and additional extra costs
Property carries with it ongoing costs that you don’t experience with other investments. Insurance costs, council rates, mortgage repayments, maintenance, renovations etc etc. These extra and ongoing costs may be regular or may come as a surprise when you least expect it.
With proper planning and the right investment you could land a property where the rental income outweighs all of these expenses and still puts money into your pocket.
Is Property Investment Right For You?
So there are the pros and cons, and yes, I have listed more cons than pros…but that doesn’t mean you shouldn’t invest in property.
One of my mentors Robert Kiyosaki puts this spin on things. “Yes, 9/10 businesses fail, but you only need 1 business to work and you have it made. So start 10 businesses until you find one that works”
We can take a similar attitude towards property. Yes there are pros and cons to investing in property, but if you get it right it could lead to financial success and financial freedom. You also have a lot of power to manage your risks and take control of your investment portfolio, so you can actually swing it so the pros are in your favour.
Ultimately whether or not you invest in property is completely up to you. If you have a passion for it and are will to work hard and learn fast then I say “why not give it a go?”. If you are one of those people then check out some more of our property tips here.
However, after reading this you might decide that property isn’t for you and you would prefer to invest in business, or shares, or commodities. My encouragement to you would be the same. Be willing to work hard and learn fast. The more you know the more money you will be able to make.