Investment Properties - Why Invest in Property?

HOW TO BUY AND ACCESS VIRTUALLY NO MONEY DOWN PROPERTY AND LAND DEALS AT SUBSTANTIAL DISCOUNTS VISION PURPOSE TRANSFORMATION ACTION FREEDOM

Bernard Salt, author of "The Big Picture" and "The Big Shift", is Australia's leading advisor to the Property Investment and Development Industry, and has been doing commentary for almost two decades on demographic trends. He reports that in recent years there has been a sharp increase in the rate of population growth. The rate of commuters from locations to capital cities has jumped by 20%. The shift towards work-life balance has prompted many Australians to live in Queensland and commute to their workplace. Telecommuting and more flexible work practices simply fed the coastal frenzy early in the new century.

In 1950 Australia had a population of eight million, by the end of the 20th Century this was now 20 million, we added 12 million to a base of 8 million in 50 years. We are a small nation of some 20 million people in charge of the resources of a large continent.

The vast majority of millionaires have made their money through property, by taking advantage of trends like these. In fact 86% of the world's millionaires hold their wealth in property. Well known people like Donald Trump, Warren Buffett and Robert Kiyosaki have used property to amass their fortunes. A large portion of the Rich 200 in BRW made and are continuing to create their wealth from property.

It's simple when you have sufficient equity you can borrow all the money you need to invest;

the repayments can be made by tenants and as an extra bonus the Federal Government provides tax concessions to property investors. This combination makes the property investment exercise very affordable and accessible for all.

In summary, investment properties generate:

Steady and increasing rental income from tenants
Increased capital value in the land over time
Attractive tax benefits on the depreciation of the physical house
Security of ownership
A growing asset base for retirement and long term benefits for family members.

If you have 7 to 10 years to work with, a well positioned affordable investment property portfolio can give you the financial independence and freedom that many of us need for retirement.

For generations, Australians have trusted 'bricks and mortar' as their favoured investment strategy. And with good reason.

While the stock market certainly works well for many, it can be a volatile and risky roller coaster ride. The biggest challenge with successful share investments is knowledge. Competing with professional traders and business people in the know can be a losing game for the everyday investor.

Why Property? - Reasons to invest in property

Easier to understand - Property investment is generally more easily understood than share investment. Although property investment requires a certain level of sophistication it does not require the same degree of technical understanding that share investing does.

Tangibility - Property investment provides tangible evidence of where your hard earned money is going. It is much more satisfying walking through your own investment property than through the aisles of a Woolworths store in which you are a shareholder.

Control - Investing in property provides the investor with a greater level of control over their investment. When making decisions the property investor has complete influence over their investment unlike a share investor whose influence is only as great as their voting power.

High long term returns - Property has historically provided high long term returns, particularly in comparison to fixed interest and cash.

Tax efficiency - Property has a high degree of tax efficiency for a number of reasons. Firstly, its returns are comprised of a growth component that may be concessionally taxed (if held for over 12 months) using the capital gains tax discount. Secondly, property can be highly geared which results in a high deductible interest component. Thirdly, property allows the deduction of a depreciation component for building write off and plant and equipment which improve the after tax return.

History

Since 1929 property has on average increased by 10.8% per annum compound growth, with much higher returns in certain regions.

Median priced property in Australia have achieved an excellent growth rate, higher than inflation, making it a very solid investment.

Historically, the figures show that the average property value doubles every seven to ten years. Of course, returns vary according to the market, location and type of property, but carefully chosen properties can offer better returns than other forms of investment.

The Australian Stock Exchange revealed that the property market had out performed shares over the last 10 and 20-year periods. It found that, between 1994 and 2003, residential property investments generated an after-tax return of between 11.4 per cent and 9.3 per cent, depending on investors' marginal tax rates.

Leverage/High Gearing

All banks will lend you more money against residential property that any other investment option (shares, trusts etc) and that includes, and even gold bullion. This in itself is a testament to the low risk profile of property. Some banks will loan up to 106% of the value of property as they know that property always increases in value in the medium to long term at a rate faster than inflation. Therefore, if you are an investor, residential property is the only investment which will retain its true value. You can bank on it!!

Some institutions will lend you money to buy shares however the level of safe gearing is as low as 50% loan to value ratio for them, and usually it is only lent on what is called Blue Chip Shares, and ironically banks will often ask if you have property which can be used as security?

Leverage relates to the use of other people's money to create wealth - namely, the banks money. By borrowing a large proportion of the value of a property you receive the full benefits of the property while only outlaying a small portion of the property value. Leveraging is the key to profiting from property. At work is a principle whereby property prices rise steadily over time. Well positioned properties tend to double in value every 7 to 10 years.

Just think of your own house: if you knew what it would be worth today when you bought it, how many would you have bought at that price if you could have afforded to? two, three, four? Many experts predict that a house that's worth $1 million today will be worth about $2 million in 7 to 10 years' time.

With increasing birth rates, record levels of migration, longer life expectancies and demographic changes in terms of more single-person households, the pressure on property values is increasing. And owning a second property is much easier and farmore affordable than your first home.

When looking at the return on property, there are different ways it can be measured ie Gross returns, referring to the capital growth and yield from the asset, or Net returns allowing for the costs in achieving the gross returns.

Australia's property market generated a 16.9 per cent total return in the year to end-June, 2007 according to data published by the Investment Property Databank (IPD) and the Property Council of Australia.

The income generated by property (rent) is safe and also increases at a rate equal to or faster than the rate of inflation.

Again, you can use the lending institutions as a yardstick. When you ask for loan for property all banks will take into account the rent that the property will generate (even if the property is not even built or if it is vacant at the time of application). This feature makes property even more attractive as it allows you to borrow more money and helps you repay your loan as rental income is consistent and reliable. It will cost you less from payday to payday to repay your loan for property than a loan for any other purpose.

If you want to check this ask your parents or a relative what they paid for their house, what it is worth now and when they bought it and do the calculation yourself. Then ask them if they thought it would be worth as much as this when they bought it.

Example

A house bought for $135,000.00 in 1987, 20 years ago
If we assume it takes 10 years for it to double (a conservative estimate)
In 1997 it would have been worth $270,000.00
Now it's worth $540,000.00

The most common question people have is "Surely property cannot keep on going up in value?" The answer to this question is yes it can. In 1967 the average wage was $55.00 per week and the average house price was $12,000.00. Currently the average wage is approximately $1,000.00 per week with the average house price at $504,000.00. The average house price in 2027 is expected to be $1.88 Million.

Taxation benefits

To minimise your tax (and receive your deductions each payday) property is the most tax effective investment of all. Under the Division 15 of our Taxation Legislation, you can claim your investment costs with property on a regular basis rather than waiting for an annual return. This increases your take home pay significantly thus allowing you to pay your loan by using our Tax Laws as a wealth building tool rather than a black hole in the various Federal and State Treasuries.

The taxation benefits of an investment property can significantly offset the cost of owning a property.

Stamp duty can be capitalized to reduce future capital gains tax
Expenses (i.e. maintenance, letting fees and commissions etc) are all tax deductible!!!
Depreciation of building and fittings can be used to offset other income and improve cash flow
If you sell, 50% of capital gains are exempt from tax (if held for more than 12 months)

Capital losses can be offset against future capital gains. The Tax Office wants to ensure that people understand how to declare rental income and claim deductions correctly You may be able to claim an immediate deduction in the year you incur rental expenses such as advertising for tenants, insurance on the building. However, some expenses like renovation costs are claimed over a number of income years.

You will need to apportion your expenses if any of the following apply to you:

Your property is available for rent for only part of the year.
Only part of the property is used to earn rent, and /or
Your rent your property at non-commercial rates.

What are capital works deductions

If you own an investment property, you may be able to deduct certain construction expenditure. These are called capital works deductions and, depending on the type of construction and the date construction commenced, the deduction is spread over 25 or 40 years.

Deductions based on construction costs apply to capital works such as:

A building or an extension - such as adding a room, garage, patio or pergola.
Alterations - such as removing or adding an internal wall, or
Structural improvements to the property - such as adding a gazebo, carport, sealed driveway, retaining wall or fence.

You can only claim capital works deductions for the period your property is rented or is available for rent. If the construction costs are incurred by a previous owner, you can claim any un-deducted construction expenditure as the new owner provided the property continues to produce income.

There are three categories of rental property expenses you can claim:

Expenses for the year you paid them, like council rates, repairs, insurance and loan interest.
Expenses that are deducible over a number of years, repairs, insurance and loan interest, and
Expenses that are deductible over a number of years, like borrowing costs, creating structural improvements and costs of depreciating assets.

You cannot claim costs associated with acquiring or disposing of a property, but they may form part of the cost base of the property for capital gains tax purposes. Renovation costs and costs to repair damage, defects or deterioration existing on the purchase cannot be claimed as an immediate deduction. These costs are capital expenditure, depending upon what is repaired or improved, and must be claimed as either decline in value deductions over the asset's effective life, or as capital works deductions over 40 years. (Source ATO).

What should I look for in an investment?

You wouldn't want to take a guess at how many suburbs there are in Australia, let alone homes. So how do you select where the best place to invest is? The key is choosing a highly desirable property. Purchasing a home that everyone wants to live in will help ensure that you get good capital growth and/or rental returns. The golden word for property investment is 'median.' This may seem contradictory as we just mentioned desirability, but having a desirable property means the majority of the population want to live there. As a result you should select a median property with a median value. Why? Because the bulk of the population live in these homes which makes them well sought after.

... You should select a median property with a median value ...

Real estate typically goes up in value... WHY, when the house depreciates in value????

The government gives us tax concessions for the actual physical home each year because thehouse is depreciating, but we know that real estate goes up in value each year? e.g. Buy a door from Bunnings today for $50 and that door will be worth what in 7 years? Maybe $5, more likely nothing, because it is used and second hand, but our real estate has continued to increase in value.

Why is this so? 'Land Value'

The true value of a residential property involves much more than the size, age and condition of a dwelling. The land value, driven by supply relative to demand, is the most important factor that determines the worth of your asset.

Land value dramatically increases in value NOT the physical home.

Land is scarce. So houses are obviously better than units, having a much higher land content which makes them improve in value faster! In fact, the house on the land is insignificant it is only there as a cash flow tool to pay-off the debt.

Land values in high capital growth areas can typically account for between 60% and 70% of the value of a given property. In rare circumstances, intense demand for entry into a locality can mean land values account for 100% of a sale price. In general, areas that are well established and close to the CBD and popular amenities like schools, shops, entertainment complexes and playgrounds will have stronger innate land values. The attractions of a given location can override any other consideration, as evidenced by the number of investor-developers who buy eminently liveable homes and demolish them to make way for new developments. Their justification might be, "We bought the block, not the house."

The obvious characteristic that will help ensure you get good returns to help service the debt, is investing in a good location. By this we mean an area that is well serviced by transport, close to shops, schools, medical facilities with plenty of job opportunities. There needs to be a reason for people to want to live there, and the more facilities there are the better. Increases in the land value of a well-situated property can add as much to its value as refurbishments to a property in a less sought-after area.

The greater the land component as a proportion of the overall value, the safer your investment is from depreciation through household wear and tear, structural degradation or changing architectural fashions.