The Rich Get Richer – Property Investment in 2016

2015121-5The richest 1% of the world now own more than 50% of the world’s household wealth. Inequality is ever widening, and asset management is key to building your wealth so that you don’t end up on the outside looking in. You may never reach the lofty levels of the ultra-rich, but clever money management may mean the difference between baked beans on toast, or going on cruises in your twilight years. As delicious as those baked beans may look, you don’t want it to be your only option!

It is important to build as large a base of assets as you can comfortably afford – the more your assets grow, the bigger the increase in your net worth. When looking at property investment, consider the following example. Two people, let’s call them Bob and Pete.

2015121-6Bob lives in a $500,000 home, it is fully paid off and he is saving his money, $20,000 per year in the bank towards his retirement.

Pete also lives in a $500,000 home, it is half paid off. He also has two investment properties, an additional two $500,000 homes which are $125,000 paid off each. He is renting them out which covers his interest only loan repayments.

 

Assuming the properties double in value every 7 years, and both men are 14 years from retirement let’s look at their situation upon retirement:

Bob:

Property 1 doubles in value 2 times in 14 years: $500,000 x2 x 2 = $2 million

Cash: $20,000 per year, with 4% inflation and 4% interest this would work out to under $500,000

Bob will retire with $2.5 million worth of property and cash

Pete:

Property 1 doubles in value 2 times in 14 years: $500,000 x2 x2 = $1.75 million (still owes $250,000 on mortgage)

Property 2 doubles in value 2 times in 14 years: $500,000 x2 x2 = $1.625 million (still owes $375,000 on mortgage)

Property 3 doubles in value 2 times in 14 years: $500,000 x2 x2 = $1.625 million (still owes $375,000 on mortgage)

Pete will retire with $5.05 million worth of property and cash

2015121-7By extending himself and gaining a larger base of investments, Pete has a good idea of how to make money and will retire with double the wealth that Bob has accrued by playing it safe. He can sell off one of his $2 million properties, fully pay off the other two and still have over $1 million in cash, his own home owned outright, and his investment property owned outright. He will still have monthly rent coming in, as well as 1 Million Dollars staring back at him whenever he logs into his bank account.  This doesn’t even take into account that after the 14 years, his rent will likely be positively geared due to the increased amount he will be able to charge.

As the population ages and more people reach retirement age in Australia, we cannot count on a pension to provide a comfortable living, as the economy simply may not be able to sustain it. Therefore, we must make corrective steps now to plan for our future to enable a standard of living that we grow accustomed to.

It is near impossible to save money at the same rate that the value of your investments increase, this is what makes it so hard for first home buyers – the more you save, the more everything increases in price. So let your money work for you. Sometimes this requires stepping out of your comfort zone and pushing yourself to maximize your assets. There is some risk, and it will also stretch your budget but If it was easy, everyone would do it. If you want what other people don’t have, you have to do what other people won’t do.

What are the risks in property investing?

  1. The market slows down and property value either slows or doesn’t grow at all.
  2. The rental market dies down and your property remains vacant.
  3. The interest rate increases and you need to make higher monthly repayments.
  4. You rent to a bad tenant that trashes the place.

How to safeguard against property investment risks

  1. Research – find the best area to invest in that will have the greatest chance to increase in value.
  2. Try and find rental properties in areas with high population density and close to amenities like public transport, schools, universities, convenient shopping.
  3. For capital growth, look at what will attract the most buyers when it is time to sell – you don’t want to just bring in investors. People looking to buy a home to live in will pay more because they will form an emotional attachment to the property.
  4. Test your budget, use a home loan calculator to find out what your monthly repayments will be if your home loan interest rate increases to 10% or higher.
  5. Shop around and get the best interest rates. Consider whether you are eligible for any government grants such as the first home owners grant.
  6. Find a good mortgage broker for your investment property, and consider landlord insurance.

Look into your financial situation, discuss with you  r spouse, and speak with a financial adviser to see whether you can afford to gain an additional property for your portfolio. AWS teams up with the leading financial institutions and insurance companies and can provide you updates on the latest news and offers from our sponsors that will help you to achieve your life goals. Complete our survey to join our member list, and at the same time go into the draw to win fantastic prizes!  Click here to begin the survey.