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Financial Freedom


Will investing in property make me financially independent ?

The basic principles of property investment are working today 
Residential property is a good investment because in many parts of Australia there is an increasing pool of tenants who need to rent housing, which creates a reliable source of income to an investor. Over the long term the value of a property should rise because land is limited in any given area. In suburbs or towns where the population is rising homebuyers and investors will compete for these limited properties, which pushes up the value of the properties. 
This is the basic theory for property investment. In its purest form property investment is simple and reliable, which is why so many people are attracted to it. This is unlike most other credible investments like the stock market, which is heavily influenced by general economic events and requires specialist knowledge or a degree of trust, in corporate executives, advisers and fund managers.

Although property investment is relatively simple it does require a common sense approach in order to succeed. For instance an investment property should be attractive to tenants and it should be located in an area where there is a history of growth in property values. The property should be realistically priced at the time of purchase and it should not be expensive to maintain.

The cyclical pattern of the property market also attracts unbalanced comments because it is easier to focus on a boom or a slump rather than considering the more important long-term trends.

The property market has been in a boom in Australia but there are huge inter-city and inter-state differences. These differences will determine the immediate future of individual markets. 

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How quick will I become financially independent?

It is official, if you want to be rich, really rich, then property investment is the way to do it. At least that is the experience for most of the wealthiest Australians.

According to the Business Review Weekly's latest rich list over two thirds of the wealthiest 200 people in Australia made their money from property dealings. Admittedly many of the super rich have diversified into commercial property investments both locally and overseas, but the majority began with residential property, particularly land and housing development.

News that many of the wealthiest people made their money from property would not be surprising. But it is significant that these people have long-term confidence in property investment.

Residential property as an investment class has had a very good run over the last five years. It has been long growth cycle and despite several mini peaks, the residential property market continues to record strong growth in property values in most sectors. A reliable indicator of the immediate outlook for the property sector is the stock of properties available for sale. Currently stock levels are at the lowest level in almost 10 years, which means pressure for more growth in property values will continue, at least until stock levels build up again.

Inevitably the property cycle will turn and there will be a slowing in the market. If you study property cycles closely you would know that the property cycle could be anticipated with confidence. But there is something different about the current market and it is usually the factor that triggers the turning points in the cycle, interest rates.

I cannot recall a time when the interest rate outlook has been as favourable as the present. After the two interest rate increases last year we feared the worst. But then there was the reassuring news that interest rate settings were on hold and now there is a realistic chance of interest rate cuts.

A long-term property investor would take a strategic position on interest rates. Low interest rates provides the opportunity to build up equity, maybe take some gains and look to new property investments while values continue to rise. The long-term investor would also look to be in a position to ride out any future increases in borrowing costs.

But the very strong signals from the money markets, economic commentators and other economies similar to ours is that interest rates are likely to stay low for a much longer period than we had expected.

This has two implications for the property sector. Stable interest rates means less volatility in property sales. And the absence of sharp movements in interest rates means that other longer-term factors are more likely to be the trigger points for changes in the property cycle, like the supply of housing.
Stable market conditions and more natural outcomes in the property market are good outcomes for property investors. Stable finance costs means an investor can plan ahead with more confidence. Meanwhile the rich continue to get richer with property.

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