Why is Investing in Property a Great Long-Term Bet?

It’s no secret that when it comes to investing, Aussies generally seem to favour bricks and mortar over other asset classes, preferring its stability and long-term growth potential.

The recently released 2016 Census results confirmed that there is a big shift in the number of people renting with nearly 31 per cent of Australians falling into this category, up from 26.9 per cent five years ago. Apartment living is also on the rise with semis, terraces, townhouses, and apartments accounting for just over one quarter of housing (26 per cent) with 13.1 per cent living in flats.

Combine this growth in people renting apartments with a strong market in our major cities offering both capital growth and good rental yield and it looks like investing in property is a sure bet.

Of course, there are always arguments for investing in stocks and shares – it’s an ongoing battle with strong pros and cons presented on both sides.

Those that favour investing in shares will claim that they are easily sold to access specific amounts of their money in a relatively fast and easy manner, and they don’t attract the upfront fees or ongoing costs that property does. At the same time, however, you are relying on the success of the company in which the shares are held, which could be negatively affected by changes in government policy, natural or man-made disasters, even just industry or company-specific bad news – factors completely out of your control.

Conversely, a property is a fundamental necessity. It will always be there and worth something, and if you choose wisely and commit long-term, its value will continue to increase over time – even if it is at a slow pace.

Stocks and Shares vs Property Returns

The 2016 Russell Investments/ASX Long-term Investing Report shows that in the 10 years to December 2015 Australian shares returned 5.5 per cent per annum, whilst the residential investment property sector returned 8.0 per cent per annum. Further analysis provided in the report shows that the 20 year returns for Australian shares was 8.7 per cent whilst the property return was 10.5 per cent.

We have based the following figures on a $100,000 investment:

Shares

Using the 5.5 per cent average rate of return as stated above, gives an idea of how much you would make investing in shares:

  • Year 1: $105,500
  • Year 2: $111,302
  • Year 3: $117,424
  • Year 4: $123,883
  • Year 5: $130,696

Total amount made after five years = $30,000

 

Property

We have used the $100,000 as a deposit on a $500,000 property with a mortgage at 5.5 per cent per annum:

  • Year 1: 540,000
  • Year 2: $583,200
  • Year 3: $629,856
  • Year 4: $680,245
  • Year 5: $734,664

Total amount made after five years = $224,000

This is based on an interest-only loan leaving the entire $400,000 to be paid off at the end of the five years. When you take out the $110,000 of mortgage interest payments made over the five-year period, you still end up with a return of more than $224,000 on your initial $100,000 investment.

Even though we are not taking into account taxes, or upfront or ongoing fees, the above gives an indication of the type of returns you could expect.

Location is another key factor. Recent figures from CoreLogic RP Data tell us that Sydney property prices have risen 64 per cent in four years; Melbourne is second at 44 per cent.

Benefits of Investing in Property

Property investors nominate the tangibility of knowing what they are buying – being able to touch, feel and have control of it as opposed to a share investment subject to market volatility.

Alongside that simple secure feeling of owning a physical location, as far as investments go property is relatively low risk. While people often talk of rises and falls in the real estate market, in reality the value of houses very rarely actually falls – it’s the rate at which prices are increasing that usually changes.

In addition to historically good long-term gross returns and ongoing income from rent, here are some other property pros:

  • Making regular mortgage repayments leads to forced savings.
  • Historically there are good long term gross returns.
  • You have the opportunity to leverage its value in order to grow your investment portfolio.
  • There’s the option of owning a dwelling you could choose to live in once you retire.
  • You can add value to your property through renovating.
  • It’s easier to understand and less daunting a subject matter.
  • There can be tax advantages in the form of negative gearing.

Location Key to Long-Term Success

We have already mentioned the impressive growth in the Sydney and Melbourne markets and prices remain high. Apart from the city you choose, any property investor needs to identify a suburb that offers strong or planned infrastructure, good schools, proximity to employment and public atmosphere.

It pays to put some time and effort into identifying price growth hot spots that, as well as those factors listed above, show the following:

  • close to shops, cafes, recreation areas
  • indications of gentrification, i.e. renovation of older houses
  • growing household incomes
  • increasing population.

When you look at the property market any ‘hot spot’ should show such indications as rising tenant and buyer demand, low or falling vacancy rates, decreasing number of days on the market for property sales, more auctions and rising clearance rates.

With strong population growth ensuring strong demand, generous tax advantages and the ability to leverage property, a property portfolio is a relatively low risk, profitable option for many people from many income brackets. In the end seeking out a property buyer’s agent may be a smarter option than a stock broker.

Cohen Handler’s team of expert buyers agents are specialists in finding the right property for you at the right price. If you are interested in purchasing an investment property, contact us now.

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