Buying and selling real estate is a favourite past time of many Australians. Statistics indicate that 2 in 3 Australians will at some stage in their lives be property owners. Becoming a property owner in the aftermath of the recent property boom is not a simple task. Despite this, property millionaires are coming out of the woodwork talking about financial independence through real-estate. Regular mums and dads on average salaries have come forth with multi-million property portfolios, owning not just one or two but a dozen or more properties. The truth is that you do not need to be a financial wiz to be successful with real-estate. It does however help to know the basic concepts. Home Sweet Home The concept of your own home is rarely associated with investment. Your home is a roof over the head of your family. It is a place to get away from it all, to feel safe and secure. Most of us choose a home for comfort, looks, design but rarely for capital appreciation. In Australia, approximately one in three homes are rented. So why do some people buy several properties while others buy none. The reasons are rarely to do with income and financial opportunity but are more to do with understanding how property investment works. Australians who understand that a home is more than a place to live, buy in areas where they expect to achieve better capital appreciation over time. They then use the accumulated growth in the value of their property (equity) as security for further real estate investment. Available Equity Equity is the difference between what your home is worth and the amount of your mortgage. If your home is worth $400,000 and you have an outstanding mortgage of $ 250,000, then your home equity is $150,000. Most people who have been in their home for a number of years would have accumulated a reasonable amount of equity either due to the growth in the property market or through the repayment of their mortgage. Your available home equity is your available investment capital. Many successful investors started off by using the equity in their own home for deposits on future real estate acquisition. Your equity can be accessed through a line of credit or a home equity loan. Depending on the amount of available equity you may be able to purchase more than one property or even top up mortgage repayments from available equity. How Does Gearing Work? One of the strongest arguments in favour of real estate investment is gearing. Lenders will make more funds available for investment in property than in any other type of investment including shares that is surely an indication as to their assessment of risk associated with that type of investment. You will find that some lenders will be prepared to lend 110% of the value of your investment property providing you have a clean credit history and a stable strong income. Gearing allows property investors to multiply their returns. If you have $50,000 to invest in say the stock market, you may be able to borrow $100,000 from the bank and therefore invest a total of $150,000. For the same $50,000 in property you may be able to borrow $500,000 (on 90% lend or 95% including purchase costs). Therefore your property investment would amount to $525,000 - $550,000. Assuming both the real estate market and the stock market will grow at approximately 10% p.a. you will accumulate $15,000 at the end of your first year with shares and over $50,000 from real estate. This difference becomes more substantial over a 10 year period assuming the same growth in both markets. Getting a Great Finance Deal As your financial position improves and your investment portfolio increases you will find many lenders vying for your business and you should be able to benefit from great mortgage deals not available to the general market. Lenders also offer professional package discounts and other deals where the borrower may receive a significant discount on the going variable rate. Tax Effect of Property Investment You will find that many of the costs you incur in acquiring and maintaining you property investment will be tax deductible. This therefore will significantly reduce the overall income required to maintain an investment property. For example the costs of your property manager, the council rates, insurance premiums, body corporate and even the interest on your investment property mortgage can qualify for a tax deduction. If your overall holding costs are greater than the rental income from your property you are able to Negatively Gear these costs against your other income therein lies the main tax advantage of property investment. Leverage Your Risk While the financial rewards of property investment are many, as with all investments an element of risk is present. Property prices can fall and if you are highly leveraged you may find that the amount of your mortgage is in excess to the current market value of your property. This is were being prudent in the choice of property, choice of mortgage and overall investment/borrowing decisions is important. If you would like to read the latest news on the Australian property and Mortgage Market please visit www.webdeal.com.au www.honeyloans.com.au |
