The difference between growing wealth and making money
We all want to make money, and we all want to grow wealth, but there is a difference between the two.
When the rental income is more than the outgoing costs to run an investment property, then obviously, the investor is making money, and there are some property investors who generate a good passive income from their properties. However, to grow wealth, it’s not just a case of buying income-generating properties, you need to look at how the value of the property will increase too.
Understanding how property investment works, and planning your strategy are key to success in investing in property.
Right now, with rates going up again, many property investors may be reviewing their portfolio and possibly their strategy, while those who are looking at investing in property, need to really think about how it can work for them with the budget they’ve got.
To help with the thought process, let’s just review some basic property investment principles and strategies, and look at growing wealth and making money.
Long-term investment
First and foremost, it’s always important to remember, property is a long-term investment, and you do need to think long-term.
While the market does fluctuate, and some areas can stay static for a period of time, generally property is increasing in value. Long term statistics show that generally, well located residential properties have more than doubled in value every 10 years.
This growth pattern has generally beaten inflation; take a look at our article reviewing the past 30 years of property values and how significantly housing values have changed over time here.
Growing wealth through equity
As a property increases in value and the owner pays off their loan, the equity in the house, ie the difference between the value and the loan, increases. This is where the wealth building aspect comes in.
Most investors aren’t cash buyers, and many have to raise the finance to purchase a second property. For homeowners, they can access this equity in their house by refinancing; while it does increase the size of their loan, it is freeing up funds, and these funds can be used as a deposit on an investment property. This is how most investors start out.
While loan repayments along with other costs associated with a rental property may limit the income, (or even the property working at a loss if that’s the best financial situation for you), the equity in this new property continues to grow.
This is when the property investor does exactly the same thing they did with their home; they refinance against their investment property to purchase a second one. And then a third, and then a fourth.
Yes, the owner is making money each month from the property, which hopefully is covering all their costs. However, each property is continuing to increase in value, and hence wealth is growing.
Buying the right property for investment success
So, the investor needs to look beyond covering costs, and generating an income. They also need to look at how the value of the property will increase over time.
Obviously, as well as looking at properties close to amenities, lifestyle options and good schools are factors in what makes a good investment property, properties located in up-and-coming areas are also ones to consider.
If the area is improving, then the chances are more people will want to live there, and hence the property value may rise more than one located elsewhere.
With the economic uncertainty, is now a good time to invest in property?
There’s never a right or wrong answer to the above question. What you have to consider is, is it right for you? Make sure you understand the principles, and also the risks, and have contingency plans in place to reduce them. We’ve already said property is a long-term investment, so if you’re expecting massive results after one or two years, the chances are you’d be disappointed.
We believe with the right advice and strategy, property is an excellent way to grow wealth; unlike other forms of investment, property usually survives economic rough times and many consider it a low-risk investment for potentially high returns. We’ve been in the business of property for nearly 50 years now, so we must be doing something right!
We do more than simply manage and sell properties; we try to give you information to help you make informed decisions when planning for the future. We’ve helped thousands of people realise their financial goals through property, and we’d like you to be one of them.
Get in touch with us to find out how our property management services can make your life easier.
Drop into the Cardiff office or give us a call on 02 4956 9777. Or send us an email at mail@newcastlepropertymanagement.com.au – we’ve helped many people realise their financial dreams through property and we’re keen to help you.
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