There’s a saying about real estate that suggests sinking your hard-earned money into property is ‘as safe as houses’.
In other words: property is fairly safe bet; it will always be in demand; well-located property will almost always increase in value; and you can derive an income stream two ways, via rent (cashflow) or price appreciation (capital growth).
But in 2020, does this statement still ring true?
This year, everything we know about, well, everything has been challenged.
Other than travel and tourism, no industry has been impacted quite like real estate, with more emergency laws and rushed legislation passed this year than we normally see in the space of a decade.
All of the truths that we knew about property were flipped on their head in space of weeks, if not days, with landlords forced into a position where it became illegal to evict a tenant for not paying their rent.
Now that we are emerging out the other side of the pandemic – in the respect that we are now learning to live with the virus, rather than react to it – many people are questioning their next move when it comes to property investing.
Does investing in real estate still make sense in 2020 – 21?
It is really a smart way to build your wealth?
Whilst the Australian property market (or markets) may be challenging, there are a number of time-tested rules of real estate that don’t change, regardless of what the market, the broader economy or even the global economy is doing.
1. Drivers of growth
Yes, our property markets are still growing – it’s going to take more than a pandemic to put a permanent stop to property price appreciation.
I don’t know if you’ve been following the trends over the last decade or so, but the rich are getting richer and the middle class is disappearing – escalating property prices in Sydney and Melbourne are a big contributor to this growing divide.
Many people think of wealth distribution like a bell curve, with most of us in the middle and outliers of the ‘rich’ and the ‘poor’.
In reality, it’s becoming more like the exact opposite: a U curve, where the middle class is disappearing.
That may sound scary – but it doesn’t need to be, and you don’t need to be afraid of being left behind.
One of the most powerful and effective ways to make sure you secure your financial future is by investing in real estate.
You may be been priced out of the prime, inner city markets, but that doesn’t mean you can’t find a well-located suburb with opportunities for growth.
Look for gentrifying suburbs (meaning more affluent people are moving in and upgrading or renovating their homes) rather than ones that are static for the best opportunities for swifter price growth.
Which leads me to my next point…
2. Price appreciation
Your long-term aim as a property investor should be capital growth – and that is a long-term play.
There are a number of things that can impact property prices in the short term, such as unemployment, wages growth (or the lack thereof), economic influences and mortgage interest rates.
But when you own a good quality well located property over the long term, all of these speed wobbles pale into comparison when you comprehend the price appreciation you’ve enjoyed.
CoreLogic data shows that over a 20-year period, the median selling price of houses nationally increased at a compound annual rate of 7.2%.
This means that on average, house prices increased just over 7% per year.
Of course some years, that growth would have been less (or perhaps prices went backwards).
But overall, those people who bought a property in year 1, by year 2 owned an asset that was worth far, far more than they paid for it.
Of course, those figures are just averages, meaning some properties outperformed others by 50 to 100%.
And a lot of this has to do with location. In fact, location does 80% of the heavy lifting when it comes to capital growth.
Multiply the above result over five properties, and you can see how successful investors create wealth from real estate.
While I recognise the importance of cash flow to keep you in the game – it’s really capital growth that gets you out of the rat race.
So while most investors buy properties for cash flow, while I buy properties for capital growth.
That’s because I buy properties to allow me to buy more properties.
Let me explain…I did not put any money in to the last property deal I did.
The capital growth of my property portfolio gave me the equity for the deposit and the rental income gave me the serviceability.
And that’s why I chose the location of that property very carefully.
That’s because the long term trend of the rich getting richer and the gap between the rich and the average Australian widening is not going to change – which is why you should aim to buy in areas where the local demographic has higher income levels, so they can afford to pay more for properties and to improve the properties they already own.
People living in many of the cheaper locations and regional Australia will experience minimal wages growth over the next few years, so there will be limited possibilities for capital growth.
Of course many of the tenants in these locations are living there because they can’t afford to buy a property, and moving forward are unlikely to be able to afford rental increases either.
On the other hand, many tenants living in the more affluent locations are the living there for lifestyle reasons and since they have higher incomes, in general they will be able afford to pay you more rent over the years.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you’re wondering what’s ahead for property you are not alone.
You can trust the team at Metropole to provide you with direction, guidance, and results.
In “interesting” times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that’s what you exactly what you get from the multi award winning team at Metropole.
If you’re looking at buying your next home or investment property here’s 4 ways we can help you:
- Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family. Planning is bringing the future into the present so you can do something about it now! This will give you direction, results and more certainty. Click here to learn more
- Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3.5 Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property. Click here to learn how we can help you.
- Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
- Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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