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How can I make money simple by Investing in Property?
By arlene | May 27, 2009
My experience has been that well located, actively managed property will, in the long term, out-perform every other investment.
Property has certain unique characteristics that can combine to make it the best investment under the right circumstances. However, there are also certain negative considerations and these should be carefully weighed up before a decision to purchase investment property is made.
These are some of the unique characteristics of property:
Scarcity Value
Property cannot be mined like gold, nor created like a company. You must have heard the old saying “they aren’t making land any more”. When all the land at Clifton Beach is built on, there can never be any more created there. Certainly land to build on can be developed on the outskirts of the city, but this development can be hindered by unsuitable geographic features such as mountains or made impracticable by long distance to facilities such as sewerage or water.
During a property boom developers may push ahead and subdivide large tracts of land which are in relatively remote locations. Prices for this type of property may hold up well for a time and then fall back. In contrast the existing developed land in very good locations cannot be added to so its price will always hold up in bad times and jump in boom times.
The ONLY factor that pushes up the price of property is DEMAND. That is why you often hear people say “The three most important things to consider when buying property are “Location, location and location“. Location is vital because it is the main influence on demand. People would rather live on the beach front than five streets back from the water, and they would prefer to be 10 minutes from work than have a two hour drive to get there. The property should also be well located within its own area’. You cannot change the position of a piece of property so it follows that over time the well-located properties must continue to grow in value.
Income Producing
If you own shares you must have looked at a dividend cheque occasionally and thought “Such a small return for so much money tied up”. And if you possess such things as gold or stamps you get no income at all. It’s even worse if most of your investment capital is tied up in vacant land — not only is there nothing coming in, you also have to pay out rates each year.
Property is one of the few investments which can provide both substantial income and capital gain. The wise investor will ensure that his assets include a large percentage of income-producing property, not just for the cash flow it provides, but also for the fact that when there are buildings erected on land, he gets capital gain on both the buildings and the land. This is one of the greatest benefits of investing in property.
Can be Borrowed Against
In the section on mortgage gearing we learnt how investment return can be dramatically increased by using borrowed money in inflationary times. Because of the special characteristics of property and its well known stability, it is still the preferred security for lenders. This puts property in the unique position of not just producing income but also being an asset which can be easily mortgaged.
Guaranteed Inflation Hedge
Over the long term it has been proven that values of well-located property will tend to follow the Consumer Price Index. Building is a labour intensive industry and each new property is built with materials and labour at today’s prices. This is the guarantee that the replacement costs of property will stay in line with inflation. If property far outreached inflation, the point would be reached where people could not afford it and if it continually failed to keep up with inflation it would be uneconomical for a builder to keep on working.
Most people invest to have funds available for retirement and the main worry for retirees is keeping up with inflation. The fact that property income and values tend to move with inflation makes income producing property, in one form or another, one of the best assets for retirees.
Stability
Everybody has heard stories about the price of property falling in certain areas and about people who have lost money in property. That is true and will always happen as inexperienced people try to make quick “kills” or novices buy property on the advice of high pressure salesmen and ignore all the basic rules.
It is still a fact that the right kind of income producing property very seldom falls in value, and, in a recession, prices will tend to plateau not fall. However, it should be added that political unrest such as happened three times during the last three decades, may have an adverse effect on residential property prices. These drops in property prices were mostly due to a glut of properties on the market as emigration rose sharply and immigration tailed off considerably. Despite these declines, prices have always risen.
There are substantial costs associated with buying and selling property and investors do not switch in and out of property lightly. In a recession owners tend to sit and wait it out and watch properties of the few who become overcommitted being sold up by the lending institutions.
The fact that property prices tend to stay stable is the reason that lenders prefer property as security for loans. Certainly, if people choose to invest in speculative holiday units during boom conditions or try to compete with experienced developers by buying vacant land in the hope of subdividing it for future development, they could suffer large losses. In my view, that is not investment — that is gambling.
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Topics: Company, Development, Form, Investment, Land, Market, Property, Residential | 6 Comments »
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