Should You Purchase Property as an Investment?
December 22, 2022 (Investorideas.com Newswire) Purchasing property is often considered a potent investment vehicle if you have the capital for it, and rightfully so.
With Australian property prices rising 1.1% year-on-year, and growth being inevitable as more people flock toward property-rich locations, creating a real estate investment stream carries an undeniable appeal to financially-able investors.
However, diving into the property market isn't exactly a smooth-sailing process. From selecting the property type to weighing the potential financing options, making the most out of your property will require some heavy thinking on your part.
If you're considering investing in property, here are some pros and cons to consider before taking the plunge. By the end of this article, you'll also get a final verdict on what side's most suitable for you.
Pros of Buying a Property
1) Property value increases over time
Historically, the value of land in populated areas has been on a steady incline.
Aside from the rising interest of people from rural locations migrating to urban areas, inflationary trends and other economic variables also drastically influence property prices. This is unlike other tangible items such as cars and electronics which gradually lose their value over time.
In general, property rates shoot up steadily and reflect the market conditions of the given period. However, if you're strategic about choosing the right location and property type, the rate of growth and return on investment can even be greater than the market average, bolstering your investment's worth even further.
2) Property can be repurposed
Unlike stocks, bonds, and paper assets, owning a property grants you the freedom to envision how exactly you can use it.
The sell or lease conundrum is a highly contested one in the property market, with both having unique advantages and disadvantages.
On one hand, you can buy a property, hold onto it while making some simple retouches, and simply flip it at a higher markup once the value increases. On the other, you can lease it out to tenants and collect rental payments as a secondary stream of income.
The more desirable investment option depends largely on what you intend to achieve with the property. If your goal is simply to build capital, then leasing would be a more suitable option as the rental payments will keep coming in over time. If you need a boost in cash in the short-term, selling may be more desirable.
3) You can leverage funds from financiers
Because of the sheer scale of a real estate transaction, it's not uncommon for prospecting property owners to need external financial assistance.
Fortunately, banks and other financiers provide various borrowing options which can help you raise capital. You can opt for investment home loans like the one offered by Homestar Finance, for instance, to fund various facets of your real estate ambitions, from the down payment to the post-purchase renovations.
Another potential advantage of leveraging is that it can immediately set you, the landlord, up to earn through their property immediately, relieving you of the need to wait many years to buy a house in full. This can be especially useful for investors who have limited capital but still want to participate in the real estate market.
Cons of Buying a Property
1) High upfront costs
The cost of buying a property can be daunting for the average working individual, especially if the loan you're eligible for doesn't provide enough coverage, or you're not eligible for a loan in general.
To put things in perspective, in Sydney, the average house cost somewhere in the ballpark of $1.2 million in 2022—an amount that is only continuing to rise.
And that's just accounting for the cost of the property itself. You're also expected to pay additional costs and fees that accompany any real estate transaction such as taxes, agent commissions, appraisals, and other hidden costs.
Property investing is a venture that has the potential to be lucrative, but its unrelentingly high barrier to entry can be hard to penetrate if you don't have the required capital or financial assistance.
2) Maintenance and ongoing costs
Besides the property fees and additional upfront costs you'll have to settle, you'll need to shell out money for maintenance and improvements over time.
This includes plumbing, structural repairs, building inspections, and other miscellaneous costs. You'll also have to pay property taxes for your investment property, an annual fee that must be paid to your local jurisdiction annually.
These costs can take a chunk of the investment's profitability, especially if you've been holding onto the property for a long time. Therefore, if you're purchasing a property, you'll have to bear in mind the recurring costs associated with it and weigh it in alongside all the other costs.
3) Lack of liquidity
Though investing in property offers substantial returns, they come with a caveat—you can't liquidate the asset quickly if you require cash in an emergency.
Unlike stocks which can be taken out in times of dire need, converting a piece of property into cash can be a time-consuming ordeal. You might have to cut the price drastically to make a quick sale, and even then, it can take weeks to find an interested buyer.
With all that said, purchasing property is a complex investment decision with both advantages and disadvantages.
If you have the means to do it, it has a high chance of being profitable. But if you're not in a position to handle the high upfront and ongoing costs, it might be better to look into more conservative investment options like stock market investing.
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