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Property Investments


Property has long been seen as the preserver of wealth, not necessarily the creator of wealth.

Property investing can be a valuable part of your retirement planning. There are pluses and minuses with property investing, and you should always consult with your Seagrims - Your Financial Planners adviser or accountant for a balanced view on both the tax benefits and investment benefits of including property investing as part of your long term plans.

Property investment has been used successfully as a vehicle to achieve wealth by average or middle income as well as high income earners.

In plain terms, negative gearing allows people to borrow money to purchase an income producing property, to claim a tax deduction for many expenses they incur running that income producing property ... including loan interest.

You tax rebates, along with your rental income are used to pay off your loan, with the tiniest in amounts coming out of your own pocket.

The end result ... down the track, the tax man and your tenants will have paid most of your running costs for you and your property will have more than doubled in value, so you can now sell it and earn a tidy profit, or use this system to accumulate multiple properties to use the rental income as part of your retirement portfolio.

In the early stages of investing in a negatively geared property, your costs like interest and so forth, are higher than the rental income you receive, so your property is negatively geared.

Apart from negative gearing, there are two other types of gearing situations which offer you even more benefits.

Firstly, there's neutral gearing which happens with the costs incurred "running" your income producing property match the income that the property generates. And then there's positive gearing, where the income from your property actually exceeds the costs of running the property.

Negative gearing is the first step for most investors because, through the HUGE tax deductions offered, it is by far the most affordable, so it enables you to purchase multiple properties for a low up-front and ongoing cost.

Once your loan has reduced, and your property has increased in value, you'll start to experience neutral gearing. This process is greatly accelerated with Mortgage Reduction.

Then down the track your portfolio will be positively geared which is the ultimate goal for many investors, enabling you to retire on a very comfortable income ... much higher than you'd expect through superannuation.

Commercial vs. Residential property - investment pros and cons


Most people think of residential property when they're thinking about investing, but commercial property has its rewards too.

The benefits of investing in commercial property

Leases tend to be much longer - anything from three to 20 years - and they are quite often secured by bank guarantees, which makes them a secure investment

Rent is reviewed annually and is usually increased either by the CPI or by 4%, whichever is the greater.

Commercial tenants will also tend to maintain the property better as the look and condition of the property is important to their business and their staff. But commercial leases also have added protection for the owner in the form of make good clauses, maintenance clauses and management clauses.

The return on invested capital on commercial properties ranges between 7% and 10% net after all costs.  Residential property investors must pay all outgoings and other costs, although of course this can be negatively geared. Deductible rates on commercial property, though, are higher than for residential because of higher depreciation rates.

The benefits of investing in residential property

You need a smaller deposit, which can be important in particular if this is your first investment property. Depending on your credit history and income, you can even borrow 100% of the purchase price. Commercial mortgages require a deposit of at least 30%. Rates on residential mortgages also tend to be lower.

Lenders are much stricter on borrowing criteria for commercial properties and if the property is not let at the time you purchase it, you may have to pay GST.

The commercial property market can be less predictable than the residential market (where historically properties tend to double in value every 7 to 10 years). There are also different kinds of commercial property to consider such as commercial, industrial and retail. With proper research, you may find that you are more comfortable making the decision about which type of property to invest in.

Although residential leases are shorter than commercial ones, residential properties are generally easier to let, meaning you will have less time when the property is vacant. It can take months to find a new commercial tenant.

As you know, when you bought your first home, you had to come up with a cash deposit of up to 20% of the purchase price, and also be able to afford the monthly mortgage repayments of many hundreds of dollars. If this was the same for buying an investment property, nobody would ever be able to afford it. Thankfully, in most cases, its not!

If you have owned your own home for a few years, you will have built up quite a bit of equity in your property. You will have paid off some of the loan, and there's a good chance that your property has increased in value too.

Instead of finding a cash deposit, the Bank/Lender (subject to approvals) will allow you to use the equity built up in your home as security on your investment property

Essentially, property investment performance means minimising your 'out of pocket' expenses and maximising your potential capital growth. Some of the reasons property investments fail to perform as expected can include:

  • The loan taken out was structured wrongly;
  • The loan was taken out in the wrong name;
  • "High maintenance" houses were purchased;
  • investors missed out on claiming the highest possible amount in non-cash tax deductions;
  • Low rents and high vacancy periods;
  • Paying too much for the property in the first place;
  • Low capital growth potential.

These mistakes can easily be avoided. Before investing, contact Seagrims - Your Financial Planners for dvice on which price range, which area and type of property are most suitable for your situation.

The 70% home ownership ratio is the main reason for the security, reliability, and predictability of residential property as an investment. Owner occupiers, people who own their own homes, do not panic and rush to sell as investors do in some other sectors such as industrial and commercial real estate, or as company shareholders do when times get tough. The residential property market is not dominated by investors. This provides a built-in safety net for the residential property market. Residential property is the only investment market not dominated by investors. It forms a barrier against substantial down-side in the market place.

That is a unique feature of residential property as opposed to all other investment vehicles. Everybody must be housed, whether they rent, or are owner occupiers. No matter who the occupier is, the capital growth is still generated for the owner. The safety of residential property is underpinned by owner occupiers who do not sell if a market lacks strength. They need more compelling reasons, are better placed to hold through softer markets and continue to need a roof over their heads.

Maintaining good occupancy is important to the successful outcome of a property investment. Here again residential property offers the safest level of exposure. We have already seen that 70% of Australians buy their own home. Correspondingly almost 30% are renters providing a huge pool of around 5.4 million Australians who are housed in rental accommodation. It is never really difficult to find a residential tenant.

If we go way back in history to the year 1086, we can review the Doomsday Book, commissioned by William I, King of England - and it did not herald the end of the world, even though it sounded that way! It was a schedule of land values across Britain at that time. It has been calculated from that base, that values have increased in England over the last 900 or so years, strangely enough, at around 10% per annum.

It is that compounding effect of property value increases which is so powerful. As each year passes growth occurs on top of growth. If a property is worth $100,000 today, and next year it increases in value to $110,000, then the year after that it increases at 10% again, that is $100,000 plus 10% (or $11,000), taking its new value to $121,000, and on goes the escalation. It's exponential growth accelerating at a faster rate as each year passes.

To use a well worn gardening analogy, it is a little like planting a tree. Early growth is slow, but as it establishes itself it grows faster, and starts to fruit. The fruit drops, and more trees grow and start bearing fruit. Before we know it, we have an orchard. It is a similar kind of compounding effect with property. Property wealth comes ever so slowly at first, but eventually arrives in abundance. But you have to make a start, no matter now small. With prudent property investment all you need is time, the right information, and patience.

In recent years, during which we have seen the incidence of inflation falling to low levels and fairly static property markets, the conventional wisdom has adopted a view that low inflation means low, or no growth in property values.

Newspapers have reported it, real estate agents accepted it, and even large property developers and institutional investors, handling millions of dollars at a time, seem to have embraced the idea. They continue to espouse this particular notion despite the fact that nobody appears able to support it with facts, or able to point to any past evidence of a correlation between low inflation and capital growth, or lack of it.

There is a link, but the facts support the view that it is not necessarily a negative at all. There are many benefits from investing in property in a low inflation environment, and particular risks in investing in a high inflation environment.

The key to understanding the relationship between inflation and capital growth, is found in two factors in particular.

Firstly, as discussed earlier, the real benefit from capital growth is maintaining a hedge against inflation, and over and above that, increasing the purchasing power of capital by having it increase in value ahead of the rate of inflation. Any change in value for a given period above or below the rate of inflation is called the "real" growth rate.

Definitely not, no matter what stage of life you are at, by setting goals now and planning ahead, you will prepare yourself for whatever opportunities and obstacles that may present themselves along the way.

For most mature people, the greatest fear is that they will live longer than their money. Fear of poverty is the number one fear from which the majority of people suffer. Sadly, so few take any action to prevent poverty or are blissfully ignorant of what the future holds for them.

Over the past 10 years the Federal Government has made it harder to qualify for the aged pension and has indicated it will make it even tougher in the future.

The introduction of the assets test, deeming on savings accounts and changes to the treatment of shares and unit trusts have all ensured that fewer retirees will get the pension.

Retirement used to be a time to enjoy. Today it is a time to fear. Australia's retirees are fast becoming the nation's poor, squeezed by lower interest rates which is slashing the income of their investments and starving them of funds to pay bills.

Today's retirees are providing a sobering lesson for future generations. Poor retirement planning has cost them their lifestyle. Retiring rich means starting to plan early and building a separate retirement nest egg on top of superannuation.

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