There are many types of investors in the property market and each of them also has their own goals/objectives when it comes to investing.
After working with various investors in the property industry for almost 10 years, we can conclude that generally investors only invest for 2 main goals:
- Capital gains (Capital Appreciation)
- Cashflow (Rent payments)
However, apart from the two goals above, there are still a number of other goals that many property investors overlook. Some of them are tax benefits, leverage, control, inflation rate and risk mitigation. The overview of each term is as follows:
- Tax benefits (depreciation expense)
There are quite a few investors that have difficulty understanding the concept of depreciation expense. This kind of expense is allowed by the government as a valid and legitimate expense. Even though it is an allowable expense, no actual money flows out of investors’ pocket. It is a claimable tax deduction for eligible properties and as the general rule of thumb, the amount usually worth more than $4,000 per year per investment property.
We believe that real estate is the only asset class in the world where banks or other lenders allow the investors to borrow the majority of the funds’ portion required and invest under the control of the investors. For other asset classes such as stocks, bonds, managed funds, savings, or gold and silver, the chance to attain banks’ lending is nil. Real estate requires low capital (compared to the value purchased) due to bank/lender funding the majority of the investment share and therefore, the profit percentage increases higher than the amount of the capital respectively. For instance, $1,000,000 investment property may only require $300,000 or 30% deposit. If profit after 7 years was $600,000 after sale of the property, then approximate ROI (Return On Investment) is $600,000(profit): $300,000 (capital) = 200%.
- Full Control.
The minute you buy a rental property, you have full control over your investment! You are free to decide which type of investment property to purchase (apartments, free-standing homes, villas, townhouses, terraces, duplexes, triplexes, quadplexes, storage, car lots, commercial offices, shops, retails, and many more) and which financing method to go to (cash, mortgage loan, private lender, etc.). Besides the flexibilities mentioned above, property investors are the ones that set the rental price, select the tenants and decide when to sell the property investment. There is full control of gaining as well as disposing the asset on the hands of the investors.
- The inflation rate.
The inflation rate is the next benefit that most investors overlooked.When the cost of living continues to increase from year to year, property investments’ value tends to follow that trend as well. Or, in other words, there is a straight-line correlation between economic inflation and the property value. If you own investment property during the economic boom (inflated economy), then it is good news for you as an investor since your property value will be increasing in line with inflation rate.
- Risk Mitigation.
Risk is the common term that many investors use in theory. In practice, however, only less than 10% of investors understand risk management. There is no such thing as 100% risk elimination in a real-life scenario, only risk management or risk mitigation. What it means that the risk is always there, but as the more investors scale up their understanding, practice, experience and Investing IQ, the risk will gradually diminish. There is also a stigma that says real estate as a brick and mortar asset (tangible asset). The tangible asset causes the stakeholders such as the banks, governments and society to realise that they could touch, feel and enjoy the presence of the security (collateral). On the other hand, stocks, managed funds and bonds are not tangible and there is a great degree of uncertainty involved in predicting the value (the value is volatile – could be up and down anytime). The value of quality properties tends to increase over time. From the facts above, we can tell that real estate investment is a lot safer compared to paper assets (stocks, bonds, managed funds).
Therefore, investment is a game for investors. As professional investors ourselves, we learned a lot during our experience in the property industry. With over $50 million in capital gains across our community, we have established ourselves as property consultants who deeply understand the needs of property investors. Please contact one of our teams to get a better understanding of the fundamental or technical analysis.