Why you should invest in property? The answer is obvious
Let’s take a step back > what are the key asset classes for you to invest in? Sharemarket, Cash at the Bank, Precious Metals, and property.
Take the sharemarket. The sharemarket in NZ is near an all time high and so is the Dow Jones in the United States. With share prices at all time highs, none is sure if a correction or market drop will happen any time soon. When you buy a share in a company, you own a small fraction of a company which entitles you to dividends (should the company pay one to the shareholder). Plus, because shareholders are separate from the management, shareholders do not have control over how the company is run. If the company is run badly, you almost have no say other than to vote to change the directors. Another problem with the sharemarket is it is difficult to leverage. Sure, some brokers lend you money or “margin” to buy the shares. But if the shares drop, you have to pay the loan back either by selling the shares or putting in your own money.
Cash at the bank? Currently, you will probably get a return of 0.1% to 1%. Factor in inflation and taxes, you are going nowhere.
Precious metals like gold and silver? Gold and silver metals do tend to withstand inflation over time but Unless you are a jewellery manufacturer, no bank is going to lend you money to buy precious metals.
Why you should invest in Property
Finally, that leaves us with property. You should invest in property because:
- Banks are willing to finance your investment with a mortgage. Even if the value of the property falls, the bank won’t call up your mortgage as long as you haven’t defaulted. So pay your mortgage repayments on time and don’t give your bank a reason to call up your mortgage。
- The rents cover the mortgage. Rental income is regular (weekly). This is much better than investing in shares when you only get a dividend (if any) two times per year.
- You have control over your real estate investment. You can choose your own property manager. If you don’t like your property manager, you can get rid of him or her quite easily. In fact, you can manage the property yourself and find tenants and organise repairs and maintenance. If you bought shares, you almost have no say in how the company is run unless you are the director of that company.
- Most importantly, you can benefit from the captial growth in value of the property. Historically real estate values have outstripped inflation.
- Lastly, you can add value to your property investments. By renovating or subdividing or even redevelopement, you can add substantial value to your property. Your real estate wealth is not dependent on “how the market is doing”.
The value of cash is constant in a non-inflationary environment and the value of cash falls in an inflationary environment. Term deposits barely keep up with inflation, while gold and silver investment usually keeps up with inflation, it does not produce regular income like real estate.
That is why you should invest in property.