Why invest in residential property?

Sydney Property Market Update
September 3, 2013

Why invest in residential property?

Residential Property Investment

The benefit of investing in Australian residential property, is the ability to leverage into an stable market which has strong population growth and the rule of law.  Properties earn income via rental payments, and  grow’s in value over time – some faster than others. The interest you pay on an investment loan is tax deductible, and the asset you own is tangible – you can touch it. People will always need a home to live in, so the risk of losing demand for the product (the property) is almost zero, unlike shares in a company.

However gone are the days when you could have invested in any residential property and hoped for the best.  The Australian property market is more complex now than at any point in history and bad decisions will not be washed away with rapidly rising prices. Any mistakes you make now can be amplified over time, as we have seen recently in the mining towns.

If you ask your local real estate agent about property prices, they will most likely say that they double every 7-10 years. However, the reality is on average prices have only doubled every 15 years, since 1880 and only every 11 years, since 1955.

There is much to ponder about the constantly changing world of property investing but the most important question (and one that is rarely asked) is this: how long will future property cycles be?

Most key experts agree that macroeconomic conditions will now lend themselves to property cycles becoming longer and this is the reason why it is more important than ever to be educated and well informed about the rules of successful property investing.

To illustrate this further, let us look into the current doubling cycle in Sydney.

In 2002, the median price was $452,000. In 2013, 11 years later, the median price is approximately $660,000. Even if prices in Sydney grew at 10% per annum for the next 4 years, it is still going to take 15 years for this doubling cycle to complete.

So what does this mean for the modern day property investor?

Yield will become as important as growth in the overall investment decision. Negative gearing will only be an effective strategy if you time the market correctly. Average decisions and average advice is not enough to achieve good results. You may be wondering at this point: is there still money to be made in residential property? Absolutely!

However, dumb luck is not going to get you through. You have to be smarter than before to achieve similar results as we have seen in the past.  Obviously not all property will perform the same, and there are many factors that affect the performance. Doing it yourself and getting it wrong, versus paying a professional to get it right can mean the difference between working ’til 65 or retiring comfortably at 55.

What others perceive as the linchpin in property investment should actually be the least of your concerns. It’s important to understand that the specific asset selection (the property) only plays a small part in ensuring the overall success of the property investment – unless of course you are a property developer. With passive investment, the property itself is a secondary consideration. Experienced investors know that timing the market is key & that some of the “ugliest” properties have the potential to produce the best returns. Understanding current market conditions and putting together a comprehensive strategy are essential to achieving success.