Are you considering investing in property but not sure if it’s the right type of asset class for your portfolio? Maybe you’re thinking about stocks, shares, commercial investment or one of the myriad other investment avenues.
The ability to significantly grow your personal wealth through property investment is widely known, but what exactly are the advantages of property as an asset class over other investment options? Here are nine reasons why property makes a good choice over other investment options.
Investors can touch and see their investment, unlike some other assets, such as shares.
Investors can receive a regular and consistent income stream through rental yields, typically on a monthly basis.
Hedge against inflation
Property has been a good asset to hedge against inflation. Property prices are simply a function of supply and demand. When inflation is high, wages tend to increase at similar rates. This leads to greater demand because people have more income and want to live in better locations and nicer houses. This demand causes property prices to rise. Given the close correlation between inflation and incomes, property is a good hedge against inflation.
Property investors can have complete control over their assets, unlike some other investments, such as shares, which can be highly influenced by large and majority shareholders and their board of directors. Through direct property investment, an investor can have complete control and choose when to buy, sell, renovate and develop etc.
Investors can add value to their assets through renovations or development, which isn’t possible with shares.
While negative gearing is beneficial for some investors in some circumstances, it is also available in the share market. For property investors, a helpful tax benefit is the ability to deduct non-cash expenses. For example, if an investor had a positively geared property which generated a net income of $4,000 per year, the Australian Taxation Office would take their share of this income. However, investors can first deduct depreciation of certain items deemed plant and equipment. If the property purchase included an $800 dishwasher, the investor may be able to deduct $160 per year over 5 years in depreciation allowances. If the investor’s net income from the property is $4,000 and the investor had $4,000 worth of depreciation, then the tax payable from the property would be $0.
Ability to leverage
Because a property can’t be stolen and is relatively stable in value, financial institutions are happy to lend to a high proportion of the value of the property. In some instances, up to 90%.
Unlike the share market, where listed stocks can be very volatile, property prices are more stable and typically don’t fluctuate as much.
Capital gains can be used for further investment
If a property investor makes a profit on a property they sell, they have to pay the appropriate amount of capital gains tax. However, if they buy a property for $500,000 and it increases in value overtime to $800,000, then financiers will be happy to lend you a large proportion of the additional $300,000 gain. An investor can then use this loan to purchase another investment property and not have to pay the tax on the unrealised gain of the first property. Holding property long-term and leveraging the unrealised gains to purchase further investments is one of the great investment strategies used by successful investors.
Damian Collins is the founder and managing director of property investment consultancy Momentum Wealth. Offering market leading research and advice on the Australian property market, the company helps clients accelerate their wealth through property investment by assisting them in the strategic planning, financing, acquisition, management and development of their commercial and residential investment properties. Damian has completed a Bachelor of Business at RMIT University and a Graduate Diploma in Property at Curtin University. Damian is a board member of the Property Investment Professionals of Australia (PIPA) and is the Deputy President of the Real Estate Institute of Western Australia (REIWA).