According to investment analysts and wealth management experts, real estate is a great investment option in Australia. In addition to generating ongoing passive income, your property investments can be a great long-term investment, particularly if the value of the assets increases over time. You can also use it as an integral part of your strategy to accumulate wealth.
Whether you plan to invest in sunshine coast developments or simply purchase residential or commercial properties, it is important to ensure that you can successfully invest in the real estate industry safely. Note that real estate investments may require you to put down a significant amount of capital (money) up front to start your investment projects.
Purchasing a residential property like a home or apartment complex can be very costly. That’s not to mention the necessary property maintenance costs you will be responsible for and the potential for passive income gaps, particularly if you’re between tenants for some time. So, why invest in the real estate industry? Here is everything you need to know.
The true value of real estate investment
To understand the true value of real estate investments, you need to think in terms of long-term benefits. Let’s first put things into perspective. For those who are considering real estate versus other investments, keep in mind that real estate is a limited resource. If you are buying your first home, keep in mind that the vast majority of your life investment will likely not be in your home! In addition, unless you are prepared to live in your home, or able to keep it up as an investment, you won’t be able to have tenants rent out and make your investment successful.
Furthermore, purchasing real estate (whether you are buying a home for yourself in order to improve your quality of life and to provide you with an asset that will help with your retirement, or planning on buying a home as an investment and holding it until the value increases during which point you will be able to sell it) requires money and purchasing power. So, how do you ensure that you get the highest possible value from your investments?
One great strategy is financial leverage. Financial leverage is the use of borrowed money to increase your investment income. Leverage financial leverage is the ability to use a small sum of borrowed money to significantly increase the return on an investment. Using little money enables you to do larger deals, exposes yourself to fewer risks, and can allow you to capture the returns on appreciated properties faster.
One example is refinancing an apartment building to acquire more high-return multifamily income producing properties. Another is purchasing a home that requires additional updates or renovations for better appreciation and then using borrowed money to renovate the property. Financial leverage allows you to change your investment strategy by using other people’s money (obviously, you have to get permission from the lender if you use borrowed money from your own personal funds). You will do higher quality property deals because you have more money to invest.
Borrowing other people’s money to increase your real estate investing is not free money, and borrowing too much money for loans can make you lose your good credit because you will owe the lender more money than you can repay. It may take longer to obtain your next property if you borrow a lot of money or if you borrow too soon. Moreover, to borrow effectively, calculate the total loan payments, interest and fees in the beginning and plug those numbers into a spreadsheet routine. Calculate every possible cost that will be associated with your loans and then estimate how long it will take to recoup the losses you can incur.
Borrowing too much money is even worse because lenders will often require a repayment of a minimum of 25% of the original loan. So, to borrow 25% of the equity in one apartment and have to wait to get the money back is an unwise investment strategy unless you have a way of getting the payments paid off! If you plan to use borrowed money to start and run your real estate investments, be sure to consult with an investment analyst who can help you avoid potential pitfalls that could derail your investment strategy.
The investments most people make in the real estate industry require that you carefully consider all of benefits and downsides, both physical and unseen. It is critical to consult credible real estate investment professionals with real experience and expertise in the local market to help you make good decisions for your unique situation. After all, the only time you will truly know what a risk you are taking is when you take it. So prepare adequately and consult with the right professionals.