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Chapter 1: Understanding Property As An Investment

 

There are many ways you can invest in the hope of making money. Every now and again, a new scam or get rich quick concept is promoted hoping to catch unwary investors seeking the magic “get rich quick” pill. No such pill exists and the end result is usually financial loss and hardship. The biggest difference between making and losing money, is being educated about the investment you choose to buy into.

Make Sure Property Is The Right Investment For You.

Two of the most popular types of investment are:

  • owing publicly listed company shares, and/or
  • purchasing real estate.

Let's take at look at the three main differences between them, with the aim of seeing if property is the right investment vehicle for you.

The Difference Between Shares And Real Estate

Volatility

Changes in the stock market are more sudden and dramatic than those associated with real estate. A stock market may be up 2% one day and then down 1% the next, but movements in property prices are usually measured on a quarterly basis.

A good analogy is that the stock market behaves like a ballerina, turning at a moment's notice, whereas the property market turns like the Titanic - slowly over a long period of time.

The more volatile the market, the higher your investment risk. Higher risk should equate to higher returns. This is why gains (and losses) in the stock market are likely to be more dramatic than those associated with owing property.

Liquidity

Most stocks can be traded easily (that is, you sell your stock and someone else then buys that stock). As such, stocks are said to be quite "liquid". You can buy and sell your shares on the same day or even the same hour, if you like.

Property is a far less liquid asset, taking significantly longer to realise cash for your investment. This is because it may take some time to find a buyer and the legal processes involved are sometimes very complex.

The difference in liquidity makes share investing a great short-term option for making quick cash, which can then be used to fund deposits on investment properties.

Returns

Returns from shares are usually derived in two ways. The first is by way of capital gain – this occurs when the value (determined by the market) of each stock you own appreciates above what you paid.

In addition to capital gains, shareholders may also receive cash dividends, where the corporation distributes profits back to shareholders. This is treated as income.

It is more common for share investors to look for capital gains rather than income. Property returns may also come in the form of capital gains if the value of the property you purchase increases in value.

But the intrinsic benefit of property investing is the passive income it can generate. A cash flow positive (or positively geared) property (one that provides you more money than you spend on maintaining it) makes you money from day one. Any capital gain you make on top of the passive income is merely a bonus.

Successful property investors usually seek long-term income streams rather than sudden (short-term) capital gains.

Why Some Types Of Property Are A Good Investment.

There are many types of “property” to choose from when considering real estate as an investment. There are houses, apartments, factories, holiday homes - even car spaces. Is one a better choice than another? Well, that depends on the market ? so let’s now examine this concept.

Unless you have experience in a particular area, keep your investment decision as simple as possible. Look to buy a house in an average area where the average person would live. There will always be demand for a "normal" house where the average person or family would like to live.

You could buy high priced property and cater for the "top end of town", but you then run the risk of higher vacancies and only having short-term tenants. More expensive houses also require more maintenance to retain the top rents charged, in addition to higher deposits to purchase it in the first place.

Personally, the basic fundamentals of property as an investment appeal to me. As populations increase, so too does the demand for accommodation. The shift in demand usually starts with average type houses, which then adds to the likelihood of capital gains over the term of your investment.

Property is also a basic human need. When the going gets tough, people can live without cars and Chinese take-away, but not a roof over their heads. You should target so-called “average” properties as a good starting point for potential real estate investments.

 

Summary Of Chapter 1.

Successful real estate investing takes time to learn, understand and then put into practice. But always remember, you should look to make a return from day one. Look only for positively geared property that may also appreciate in value over an investment time frame of ten or more years.

Also, understand that real estate, as an investment, is not particularly "liquid" and it that it may take months between when you decide to sell and when you receive cash.

I like property as an investment opportunity because as population increases, so to does demand for accomodation. So called average houses, where a "normal" family would live, are good prospective investment properties as demand will always exist and long term vacancies are unlikely.

 




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