Why invest in residential property?
All forms of investment fit somewhere on a sliding scale of risk and return. Generally speaking, the higher the risk, the greater is the expected return. If the return is low, security should be proportionally high.
Real estate, compared with most other forms of investment, has a relatively high ratio between security and income yield. The difficulty with most other forms of investment is that they either represent extremely poor security or provide a very modest and uncertain return. Their ratios, between security and income yield, are low.
In this respect, real estate is far more attractive. While the sliding scale of risk and return still applies, it does so at far less extreme poles of variability. In short, it is usual for an investment in real estate to provide both security and a reasonable return.
Compared with stocks and shares, the property market has remained relatively stable and has provided a good hedge against inflation. In fact, price monitors have found that investors in a portfolio of top industrial stocks had a 30 per cent chance of losing money, where investors in an average parcel of real estate had only a 10 per cent chance of a loss, for similar profits.
Other benefits of investment in real estate
- knowing your
money is in 'bricks and mortar'
rather than pieces of paper
- the ability to
take real control over your assets
through renovations and
- since rent rarely
goes down, returns from investment
tend to be more
- constant than
from other kinds of
- significant tax
benefits and the possibility of
On the other hand, property investment can have its down side:
- real estate investment is sometimes described as 'low risk, low return': you gain security, but may not reap the financial rewards attainable in the
|Real estate is less of a 'liquid asset' than shares: with legal costs, and stamp duty charged on every property purchase, it can be costly to buy and sell
Most financial advisers suggest that when investing in property, you should think long term. This means not selling your investment property for 5 to 7 years, the average length of the housing cycle. Well-selected residential property should double in value over this time period.
But you must always consider your assets, including your cash reserves and the proportion of your current home you own. What impact might the birth of a child have on this investment plan? Does it mean a lot to you to have an overseas trip in several years time?
To make the most of your investment, you should aim to borrow some or all of the purchase cost. This is called leverage: using the 'lever' of credit you can make a much more substantial investment and, in the end, reap much greater rewards.
Financial advisers may recommend that you follow a long-term goal of building up a property portfolio, where the rewards from your first investment are ploughed into buying a second investment property, and so on until you own a substantial amount of real estate.
Nearly all of us want to be wealthy - and nearly all of us retire below poverty line!
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