More and more people are investing in property, but despite its popularity and evidence that it’s a great strategy to grow wealth, those who aren’t doing it tend to share similar reasons as to why not. Louisa Sanghera from Zippy Finance explains the pros and cons of investing.
People who want to invest in property but aren’t ready to take the plunge tend to fall into these categories:
- I can’t afford to invest
- Investing in property is just not for me
- I wouldn’t even know where to begin
- What if it goes wrong?
There’s no doubt it can be a daunting process and that it’s a big investment, but so many people believe they simply can’t afford it and it’s something “rich people do” but this simply isn’t the case.
So, what’s YOUR excuse for not investing in property?
1. I haven’t got enough savings or equity in my existing property
Every single one of us has a unique financial position and plan for the future. No one investment strategy can fit us all, we need to find a plan that is as unique as us.
It’s true, you do need to have some security but there are options out there to even those of us with only a small amount of savings or equity. Discuss your situation with your financial planner and mortgage broker and they can identify a tailor made strategy for you.
2. I can’t afford to buy in Sydney
Property prices have without doubt increased substantially in our major cities in recent years, but have you considered that you don’t actually have to invest in property in the same city you live in? There are several areas which research shows are still affordable to investors.
Using equity to purchase an investment:
Your owner-occupied property has $200,000 equity. Access $100,000 of the equity to take your borrowing to $400,000 (80% of the total value thus avoiding LMI) and use $95,000 of that equity as a deposit (plus costs) on an investment property valued at $400,000. The remaining 80% is then borrowed to complete the purchase.
3. With Trump as president, is there is going to be another property crash?
It’s all about your attitude to risk, and this is something you must discuss at length with your financial planner. On any given day, the media will have a tale to tell about impending doom and gloom in the economy both here and abroad. You have to surround yourself with a team of professionals that you trust and make decisions based on research and try not to be distracted by the naysayers. History has proven that property works in cycles. It goes up, it comes down, but eventually, it comes back up. By all means, take notice of the media reports, but you also need to look at the bigger picture and importantly, look long term.
4. What if negative gearing rules change?
It’s important not to base your investment strategy on negative. It is purely a financial outcome after your property income and expenses have been taken into account and there will always be a risk that the government will change the rules. It’s really important to understand negative gearing and its implications but like the property price cycle, you need to adopt a long term view and it certainly shouldn’t be the reason you choose NOT to invest.
5. What if interest rates rise?
Interest rates are currently at record lows meaning there’s certainly never been a time when it was so cheap to borrow. But many of us remember rate hikes to 18% and worry that it might happen again. In finance, never say never. We cannot predict actual future rates, and while it’s not impossible to see rates as high as that again in the future, it COULD happen. Should we not invest now for fear that this might happen? Again, that really comes down to your personal attitude to risk after discussion with your financial adviser but research tends to indicate that the long term average for interest rates will be around 7%. And remember, with higher interest rates, comes increased rental returns. Your mortgage broker will be able to provide you with scenarios based on several interest rates and how it will affect your cash flow so you will be well informed as to the impact of future rate changes and should plan accordingly.
5. What if the tenant wrecks the place?
We’ve all seen the stories in the media about tenants trashing their landlord’s property. It certainly can and does happen, but it’s really not as common as you might think. The key to dealing with this is having sufficient insurance in place which will cover these costs if needed.
So What’s Stopping You?
Property investment simply isn’t the right vehicle for everyone. For some, these questions we have discussed are not just excuses, they are bona fide reasons why they won’t invest, or they have a different strategy in mind. And that’s OK, it really isn’t for all. But for those who do take the plunge, who undertake as much research as possible, who understand their goals, the market and surround themselves with a team they trust, there can be great success.