From an appreciating value asset point of view, you only need to look at the long term effects on real estate values to see why owning investment property can be a very good idea.
For many buyers who are borrowing, say typically, 80% of the purchase price, it is a form of “forced saving”. The mortgage repayment is assisted by rental income received by the owner/”landlord”. Added to a saving regime, capital growth (value) of the asset increases as the real estate market rises. Over an extended period of capital growth, the size of the deposit – or “equity”, diminishes in proportion to the overall rising value. In other words the “capital growth” has been built on the original 20%.
Let’s look at a simple example… If a property were purchased for $200,000, assuming a 20% contribution, the buyers deposit (equity) would be $40,000. When that property at a future time reaches the point of being worth $400,000, the $200,000 “profit” has been made from the buyer’s original $40,000. That’s a $200,000 gain from a $40,000 initial deposit outlay. This in a nutshell, is how it works.
There are of course outgoings and expenses: at the time of purchase – State Government stamp duty being the largest, and other deductions during ownership – the largest usually is the mortgage. All these costs reduce the original gain. However the burden of the mortgage and other outgoings is reduced by the rental income. If the investment property is owned for long enough, the mortgage will eventually be paid off and the property owned outright. It may be a decade or two, but at this point, the property may be worth multiple times its original cost and is now owned without a mortgage. For those with foresight and patience, ownership of an investment property or two, in addition to the family home, provides great financial safety and security later in life. And what should not be underestimated, a rental property also provides a home. It may be that a future family member may live in one.
If you are considering buying an investment property, before doing so we advise you receive sound professional advice from a competent person(s) who is familiar with your financial situation. Renowden Buyers Advocates can provide advice and assist in the search and purchase of a suitable investment property for you. However we are not financial advisers, nor can we provide you with legal and taxation advice. Buyers are advised to take a long term view when purchasing an investment property. Short-term fluctuations in values can occur in the property market.