investing in real estate

Investing in real estate: Why does it work so well?

10 Mar, 2017

If you’re in the market for a long-term investment opportunity, investing in real estate is undoubtedly one of the best choices as long as the property is well located and actively managed. It’s also a form of investment that most Australians feel comfortable with.

 

Investing in real estate: a unique combination

What makes investing in real estate such a good prospect? It’s really the combination of a number of factors:

Scarcity value

The old saying, “They aren’t making land any more” rings true here. We can’t create any more land than we already have, and this adds value to what we do have. Although cities spread out over time, they may reach their limits because of geographic features such as seas or mountains. And they can’t just spring up in the middle of nowhere because we need connections to facilities like water and sewerage.

Developers may expand into more remote locations during a real estate boom, but land here is unlikely to hold its value as well as in built-up locations where space is already limited.

The reason that location is so important when investing in real estate is because demand is such a strong determiner of price. You want to have people fighting over your property when you come to sell or rent it, and the best way to achieve this is with an appealing location. People would rather have a seafront property than one that’s set five blocks back, and a short commute to work is preferable to hours stuck in traffic. Although an area may develop overtime, the fundamentals of a good location won’t change.

Income-producing

Some investments produce a strong capital gain with very little regular income, and if you have capital tied up in vacant land you’re actually paying out each year for rates.

With real estate, you have double the chance to make money – through rental income and then through capital gain. The additional cash flow allows investors to build up a portfolio faster than they would otherwise be able to, and this is one of the big draws of real estate.

Borrowing opportunities

Lenders will always prefer to secure a loan against real estate because of the stability it provides. Gearing an investment can serve to considerably increase the potential return, so your investment property not only provides you with a source of income but can also be mortgaged to fund other investments at the same time.

Inflation hedge

There is a good reason why well-located property stands an excellent chance of holding its value in line with the Consumer Price Index. New developments are built with materials and labour at current prices, so the replacement costs of property must follow inflation. In a world where property prices ran far ahead of inflation, few could afford to buy, whereas if prices tracked behind inflation it would be uneconomical to continue building.

But…

Although all of this sounds good and there are certainly a lot of factors working in favour of real estate investment, this doesn’t mean it’s a risk-free way to build wealth. Of course it’s still possible to lose large sums through bad luck, bad management, or a bit of both. Make sure you understand the pros and cons of any kind of investment before you commit.

 

To summarise:

  • Real estate offers a unique combination of factors which make it a particularly appealing way to invest
  • In well-established areas where land is scarce, demand for good locations will push prices up
  • Real estate provides investors with regular income as well as an ultimate capital gain
  • Due to the security of real estate you can borrow against it to gear other investments, significantly increasing your potential return
  • The unique characteristics of real estate mean as long as it is well located it will always track pretty much in line with inflation
  • This doesn’t mean it’s a fool-proof investment; you should still do your research and understand the potential risks
(Visited 25 times, 1 visits today)