Investing in real estate is one of the most effective ways to acquire wealth and literally build your financial independence.
But before you start investing in property, you need to have an understanding of the fundamentals of the Australian property market. That way you can make informed decisions to maximise your returns.
But don’t worry; learning about property isn’t anywhere near as complicated as trying to understand stocks and shares, or foreign exchange trading or other investments such as silver and gold.
In fact, if you’re like many Australians and own your own home, you’re off to a great start because you already have an interest in the property market.
Unfortunately, many Australians don’t think about their homes in the right way. Which means they’re sitting on a valuable asset they could use to build their wealth, but most don’t take advantage of it.
The problem is most of us have it drummed into our heads from an early age that the best thing we can do is pay off our mortgage as quickly as possible so we own our home outright.
On the face of it, that sounds like a great idea and it might give you a sense of security. But the truth is, whilst paying off your mortgage may make you feel good, it’s actually stopping you from building the wealth you and your family could be enjoying.
That’s because as you pay your mortgage each month you’re building more and more equity in your home. And that’s money you could put to good use.
So here’s a sensible property investment strategy that many have used to transform their lives—borrow against your home to release equity and then use this to buy other properties. Then, as you build up equity in each of these new properties, use it to buy even more properties and keep on doing the same.
This means that rather than paying off your home loan, you’re using the property as your personal bank to fund the purchase of income generating assets.
This is a tried and tested way to get wealthy, it may take a bit of time to build that first bit of equity, but when it starts working for you, your assets can start building more and more rapidly.
Of course, when you use your equity like this, you’ll actually be increasing your level of debt. But because you’re using this to increase your income and create assets, getting into debt this way is better than borrowing to buy a fancy car or consumer goods.
But, if you are looking to use property investment as a way to acquire wealth, you need to know the best types of properties to buy and where to find them. And this introduces us to one of the most fundamental ideas in both business and property investment, the law of supply and demand.
Simply put, the law of supply and demand says that if lots of people want something and there’s not enough of it, prices will go up, which will encourage more of it to be produced until there’s enough to meet demands. At which point supply and demand are equal and they stay that way until something pushes them out of sync and the process starts again.
One of the best ways to make sure you keep hold of your wealth is to hold on to your assets rather than selling them. That’s even truer when you think that if you sell, your real estate agent’s commission and government taxes, like Capital Gains, take a chunk out of your profit.
But that doesn’t have to happen when you’re a property investor because you don’t need to sell your assets to make money. When you want to get money from your properties you can just refinance and get access to your equity that way.
So really the only time you should consider selling your property is if you can buy another that will give you a better return, that is, sell one property for another that will make you more money.
Of course, when you see prices going up each year, it can be easy to think that you’ll never be able to get into property, especially when you hear experts talking about its lack of affordability for many Australians. And it’s true that in some cities like Sydney, Melbourne, Brisbane and Perth, property can be unaffordable as prices and interest rates keep many Australians out of the market.
But, there’s another way to look at it.
Even if people can’t afford to buy property they have to live somewhere and that means having to rent. So, if the demand to buy houses falls, demand for rental property goes up.
This means that property investors are now looking to make money not by achieving large capital gains when they sell, but from regular rental income.
So don’t worry. There are five very real reasons to believe that the market is sound right now.
One, the population’s increasing. This means more and more people are looking for somewhere to live, which is great news if you have a property to rent or sell.
Two, the property marketing is resilient to downturns in the economy. So even after the recent global financial crisis, when many thought Australian property prices would drop by as much as 40%, prices in the real estate market have remained remarkably stable.
Three, with an unemployment rate of around five per cent, most people have jobs. If you want a job you can find one, so people are earning the wages and salaries they need to pay their mortgages and rents. This means the Australian market isn’t being flooded by properties people are forced to give up. Which keeps rental and purchase prices stable.
Four, we have more disposable income because in recent years taxes have fallen, so we’re more likely to pay off our home loans.
And five, households are richer than they were in years past because today there’s often more than one salary coming in. This is different from a generation ago when there was only one breadwinner, this means more couples and families can afford a bigger mortgage.
These are all fundamental factors that suggest there will be no crash or major correction in the property market in the short-term and why you should do your very best to become a property investor.