We grow wealth for many reasons: to create options, retire comfortably, improve security, or help the next generation.
Whatever your reason is for growing wealth, there are many pathways towards achieving wealth. What’s suitable for you depends on a variety of factors. However, we often get asked whether property investing is a good option. With market conditions easing, impending relief with mortgage rate cuts, and house prices still low, we can see why this asset class is an appealing choice.
Let’s delve into the role property investing plays in wealth creation and how it might fit into your investment portfolio.
Why property? The power of leverage
When comparing different investment options, we often consider the growth an investment might achieve over a specific timeframe and the level of risk that comes with it. When considering property, it’s not just the year-on-year growth that makes it advantageous but the power of leverage.
For example, if you invested $100,000 in a managed fund earning an average of 5% annual return, you would get a return of $5,000 (before fees and taxes).
However, if you used the same $100,000 as a 20% deposit on a property and borrowed $400,000 to purchase a $500,000 property (if buying new), you’ll not only earn a $5,000 return on your deposit but the capital gain on the $400,000 you borrowed, making your earnings $25,000 to be exact.
How property investing works in more detail
Property investing is no longer as straightforward as it once was. Today’s economic environment provides us with a different hand of cards to play, one that requires more intention and strategic thinking. And it may not be for everybody.
To determine if property investing is right for you, let’s start by looking at what success looks like:
- You have the ability to secure lending.
There’s typically a limited timeframe that banks are willing to lend money, the older you get (post 65), the more reluctant they are to loan to you. - You have sufficient cash flow surplus.
This means you have the ability to keep up with repayments, including a top-up if required. - You have the right hold strategy.
This is where times have changed. Buying and flipping may not be a wise approach. For guidance, we suggest the right hold strategy, which means you have the ability to hold for a full property cycle to reap the rewards on its earnings. - You buy the right property for your circumstances and goals.
Understand the problem you’re looking to solve, whether you have a retirement gap to bridge or want to leave a legacy for generations to come. - You are cash-resilient.
With any investment, there comes risk. For successful property investing, you’ll want to be able to weather unexpected costs that arise, which means you have an emergency fund available at hand.
Once you’ve determined it is right for you, it’s time to create a strategy that works best to achieve your goals, which may include:
- Identifying the right property.
Standalone, semi-attached, or apartment? Each property type will perform differently, and it depends on what you’re trying to achieve, whether it is growth or passive income. We also find that new builds are better because they require less deposit (20%), typically have fewer maintenance costs, and attract better tenants. - Identifying the right location.
Contrary to popular belief, you don’t need to invest where you live. Understanding which areas are primed for growth over the next few decades is a good place to start. - Determine the timeframe for which you’re able to hold that property.
As a guide, we consider a whole property cycle of around ten years or so.
What about the risks?
With any investment comes risk. But keep in mind that doing nothing also comes with risk. Some of the potential risks involved with property investing include:
- Buying the wrong property with the wrong capital growth rate or yield.
- Committing to a weekly top-up that is too high.
- Working with the wrong builder.
- Not building in cash flow contingencies.
Take note that none of these risks involve ‘buying at the wrong time in the property cycle’.
Our partners at Momentum Realty list common risks involved with property investing and how to mitigate them, which you can read here.
Have I missed the boat?
Given the volatility we’ve recently experienced in the property market, many might wonder if they’ve missed the boat. This all depends on the age and stage you’re at in your life. If time is on your hands and you have the ability to hold a property for the long term, then the ship may not have sailed.
But there is no ‘perfect time’ to invest. We often say the best time to plant a tree was ten years ago; the second-best time is today. With that said, we are at an opportune time to act now. Mortgage rates are on the decline, and property prices are still at the trough. So, if you are ready to invest, why wait?
Take the next step in your property investing journey
Property investing can be a lucrative way to grow wealth. However, being successful in it takes strategic planning and deliberate execution. We no longer live in the era where any property solves the problem you’re looking to resolve.
Talk to an expert to understand whether property investing is right for you. For more information, contact your wealth adviser or an enable.me financial coach.
Alternatively, if you’re interested in exploring other strategies for your investment portfolio, we invite you to book a financial review. Contact the AdviceFirst team on 0800 438 238 or email hello@advicefirst.co.nz.
Disclaimer: This blog is for informational purposes only and does not constitute individual financial advice.
