Why Property Investment Works For You

Posted on Wednesday, July 17 2013

Property Investment Basics For Any Budding Investor

Property Investment as a form of wealth creation definately works and there are many good reasons to own Real Estate anywhere. First, property is a tangible asset. It can be just the land itself or it can be a combination of land plus Dwelling in the form of Brick-and-Mortar, Weatherboard or any structure which has the potential to generate income, appreciate in value by capital growth or by adding value. Whether it has buildings or not, it is easy to add value by subdividing an existing section or dwelling, increasing the rental income, building or adding to the already existing buildings.

Real Estate has historically proven to have positive long–term capital growth prospect, due to the fact that it is almost impossible to “create more land,” the land itself lasts forever, and buildings tend to be long-term items which are in demand.

Property price increases vary widely across New Zealand, with some areas showing much stronger growth than others. However, when considered over a ten-year period, there is very little difference in total appreciation in the different regions, and over this ten-year period the average annual increase has been just over 8%.

Most property investment keeps up well with the rate of inflation and so provides good capital growth. It also tends to generate income more readily than things like precious metals (gold, silver etc,) art, and other more perishable items. Property is easy to leverage and most banks would take property as security before other less stable investments.

The Leverage Effect In Property Investment

Property Investment Leverage

The fact that Banks are happy to lend against property leads us to one of the greatest benefits of Property Investing: The Leverage Effect.

The Leverage Effect can work both ways, but if the right investment approach is taken over a period of time, the Leverage Effect will create great equity and Internal Rate of Return which would have been impossible to achieve if investing in an asset which requires 100% Cash input to own.

The Leverage Effect example:

Let’s consider an investment in an asset which requires 100% Cash input to own like Shares, Stock, Bonds, Gold, etc:

In nearly all cases your $200,000 cash investment will buy you $200,000 worth of Shares, Stock, Bonds, Gold, etc. The value of your investment at the time of purchase is exactly the

amount you paid for it, and there is nothing you can do to increase the value of your Shares, Stock, Bonds, and Gold investment portfolio.

Now let’s look at Property Investing: Clearly you could buy $200,000 worth of property with the same amount of cash. But you could also buy $400,000 worth of property taking only a 50% loan from the bank. In today’s market you could borrow safely up to 80% of the property value; this would result in owning a property worth $800,000.

In the world of realty if you bought well or had the opportunity to add value, the actual market value of your property could be as much as $950,000, which is an immediate equity increase of $150,000.

Some Property Investment Scenarios To Put It Into Perspective

Now let’s consider the Leverage Effect on both asset classes:

Scenario #1: Pay $200,000 cash to buy $200,000 worth of Government Bonds.

Scenario #2: Purchase a property worth $1,000,000 by borrowing 80% of the property market.

For the purpose of this example let’s say the value of the asset in each scenario increases in value by 10%. Here’s the result:

Scenario #1: Your Government Bond investment would have a value of $220,000 which is simply the 10% increase in value added to the cost of the investment.

Scenario #2: Your Property investment, which also increased in value by 10%, is now valued at $1,100,000. But the actual Internal Rate of Return is a whopping 50% on your cash invested.

Scenario #2 is “no brainier” in terms of which is a better investment, although it is important to realize that the Leverage Effect could work both ways. If the market value of a property drops by 10% then the reverse could happen. In the case of the Government Bond, only 10% of the investment capital would be lost. The Real Estate investor would lose 50% of the investment.

The risk of such a downturn could be minimized by following three basic rules.

If you want to learn about my 3 basic property investment rules and much more, you can purchase my eBook “New Zealand Real Estate A Great Place to Own”

Leverage is essential if your plan is to grow your property portfolio, since borrowing money would enable you to buy more properties than you could without borrowing. Using the Leverage Effect maximises the potential beneficial effect of rising property prices.

(the above is extract from chapter 1 of my eBook)

 

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Expert's Bio

Hadar Orkibi

Hadar is a full time Property Investor and Trader, Specialising in Do-ups & Add value, Multiple income properties, High Yielding, Commercial, Equity and "Move Forward" Properties. Hadar is co-owner and Sales & Marketing Mangers at www.PropertyGenie.co.nz. Owner of the Private House Buyers companies www.WeBuyProperty.co.nz & www.PropertyBuyersAuckland.co.nz/ Find Hadar on Google+

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