Is Buying a Property a Good Investment?
So you are ready to take a dip into the property market but are asking yourself a very important question. Is buying a property going to be a good investment for your financial future?
Many people have likely told you it is. Your parents, your friends, so many believe the best investment a person can make for a better future is to own a home for example. There have been times though where this has not been true, so how about in today’s market?
In this article I will guide you through what to consider when buying a property especially in terms of investment purposes. Since for most people property purchasing is going to be the biggest spend they make you need to get this right. With the following key information and advice you will be able to come to the decision that best suits you.
Will You be Living in the Property or Renting it Out?
Crucial to this decision is whether the property you want to buy is going to be a home for you or something you intend to rent out. I can tell you right now that if you are going to be living in it, this is not a major financial investment.
Of course owning your own home in itself is a great step to make. But if you never intend to re-sell or the property is going to be your main residence this is not an intelligent investment for your future finances. Beyond Your Hammock founder Eric Roberge can be quoted saying,
“A single family home is not an investment…It may gain money over time, but if you’re looking to invest, buying a single family home and then living in that home is not the place to do it.”
You may be wondering why this is the case so here are some observations from the experts;
- In the long run homes rarely grow a great deal in appreciation more than inflation. Appreciation for real estate tends to happen more in specific niche markets. People will see their old family home their parents paid $100,000 for and today it is worth $500,000. Wow that is a profit of $400,000 right, a return of 400%! Well now take the inflation into account and that profit drops significantly. Then also add in the taxes, upkeep costs, interest to the bank on the original mortgage. Suddenly the figures are not quite so great.
- Less control over when you want to buy and sell. A home is bought and sold according to when you need somewhere to live and when you are ready to move on. It is less about the best times to buy and sell and how the market is performing.
- Borrowing against your house creates a liability and it is risky.
- Buying a property will cost you more than just the initial purchasing price. It will need further cash in its upkeep compared to other investment options that do not, and that upkeep is ongoing not a onetime thing.
- If you are living in the property it is not generating an income. In fact it is costing you money in its upkeep and mortgage.
Do You Have or Are You Starting a Property Portfolio?
Property investment is not for everyone. As stated being a home owner should be separate to buying a property as an investment. Robert Kiyosaki, personal finance author and teacher breaks it down to something we can all understand, your investment or asset needs to bring in income. If a property is taking away money, it is not an investment, it is a liability. If you buy a property and it then generates money for you in rent, this is a good investment.
Your property portfolio needs to work for you. A property investment should mean you can access money from it, not have it all tied up. Unless of course you are able to invest in niche properties with high demand and are able to buy at low cost and sell when the market is good.
Buying a property for investment does not mean don’t buy your own home!
Can you still buy a house that you want to live in? Of course you can! Just do not buy it thinking in terms of investment. Yes you get a great lump sum when or if you eventually move, but that really is money you have put into the place along the way.
If you rent out a property though expenses in terms of maintenance, repairs, mortgage and such can be covered by the money tenants bring in. Each year when there is a hike in things like taxes, inflation and such, you can put up the rent accordingly.
Some experts are likely going to suggest that to reach financial success you should;
- Buy your home
- Pay off the mortgage quickly
- Make sure you do not spend everything you have each month
While this may give you some security, and is a great way to see that you are not deep in debt, it is not the best way to generate more income. Investments should increase your wealth. In a study undertaken on the subject by the London Business School and Credit Suisse it was found that in a period of 90 years there was an increase in return of 1.3% a year in housing, after inflation.
How do You Know Whether to Buy or Rent?
Buying a property depends a great deal on what your future plans are. Do you see yourself staying in the area for another 5, 10, 15 years, or even for the rest of your life? Are you in a career that is stable or could you be asked to move? What can you afford in the area you are living in?
Nowadays people do not stay at the same job for 40 years, buy a house in the same area they grew up in and raise a family in it. We move around more both in terms of living place and work place.
If you want to make an investment in a property do you need to be close to it or will you pay people to deal with that? Are you ready to settle down? An interesting study from Ohio State University carried out by a professor of economics did show that children have a better learning achievement and lower behavioral issues when in a home that is owned rather than rented.
A Good Property Investment Today Can Make a Difference in Your Retirement Income for Tomorrow
I cannot tell you how many times it has been suggested to me that a good reason to invest in a property to use as a home is for retirement. Again this is not a good investment. If you are looking towards your retirement and looking for something to add on to your pension for income, your house is not going to help. Why not?
- You still have property taxes and upkeep on the house to pay even when mortgage payments are done.
- I have said it before and I will say it again, your home does not generate money.
- You need to create income from rental properties, or from dividends and other such investments on top of what pension and social security you may get.
Producing Profit in a Property You Live In
There are three options that would allow you to have somewhere to live and also generate an income, thereby being a good investment as well as your home. This would keep the interest rates lower too since you are residing in the property.
- Buy a house, live in it, move, then rent it.
- Buy a multi-unit property, live in it, rent the other units out.
- Buy a house, live in it, move in tenants to any spare rooms.
Basically while living in the property you want to have others renting out part of it, this will mean expenses in home ownership and upkeep are covered and you are earning an income. The first two options do require you to have a certain amount of money to be able to afford a larger property, or to afford owning more than one house. However do you want to live so close to your renters where they know where you live? Are you prepared to share your home with tenants 24/7?
Tips for Property Investments
This is a commitment, of money and of time. When buying property as a good investment there are some tips financial experts will offer.
- Avoid borrowing money to make investments. If possible use cash, if not at least make sure monthly mortgage payments are really something you can cover, even when the property is empty. Otherwise it becomes a burden rather than a source of income. It could also do a lot of damage to your credit score.
- Plan and plan some more! Work out all those upkeep costs, taxes, regular repairs and such. If it is not something you have experience with it may be a better idea to let a company handle the rental property for you.
- Take out insurance.
- External factors. Before you buy make sure there are no external factors that might effect whether you can rent it or not.
- Do not get over confident. Make your first investment smaller and learn about the process. If things do not work out you will have less of a loss to recover from. You can then work towards either more properties to invest in, or larger ones. In just five years, half of property investors sell their real estate and 90% of them do not invest further. Often it is from being over confident in the return they will get and then being disappointed in the results.
- Location location location! Think about where the property is. Access, traffic, potential renters. If you are buying near a university you may consider renting to students but they have a high turnover. Properties in desirable locations are going to be easier to rent but may cost more initially.
- Business or residential? Are you wanting to rent out office space for example or living spaces?
- Is the market right for property investments? We all saw the huge crash recently and no-one wants to go through that. It is worth paraphrasing Sahil Gupta, Patch Homes joint founder, a company that deals with home equity finance, who believes that when you focus on the long term as you should with property investment, the ups and downs of the property market are less of a concern.
What about all those reality shows where homes are being bought and sold for profit?
We are all guilty of getting sucked in to at least one reality tv show and there are plenty out there on buying homes, renovating homes and selling homes. If you are keen on diversifying your investments and want to do more than your standard stocks and bonds that might include property investments.
The facts of property renovation and sales though are less romantic and sadly less successful for most buyers than those shows make out. Some do make an income from it. But not the majority.
That kind of income generation too takes work, it can be more of a job in fact than an investment. Key to that kind of income is getting properties at very low prices in desirable areas, having the skills to renovate for just a little money, and selling when the market is at its highest demand. Renting on the other hand creates a monthly income, and then any appreciation on property value should you look to sell is just a bonus.
6 Reasons to NOT Buy a Property as an Investment!
I have heard many investors talk about why they are choosing to invest in property and here are 6 of the top reasons you should not be giving!
- To pay less tax – negative gearing is not a super savvy strategy for investment!
- Scared of missing out on the property boom – you heard someone at work boasting about the killing they made on a property purchase and you want to jump in on it before the market drops.
- A clever get rich quick scheme – property investing is for those looking to the long term. The first few years are about learning and then it takes time to build up a base of properties bringing in a good income. Be patient.
- You do not know anything – being a home owner does not make you an expert in property investment.
- Emotional reasons – avoid investing based on overly strong emotions. Mistakes are often made this way.
- Do not have the money – do not put yourself in this amount of debt. You should have a good income, have a stable career and good credit. You should also have sufficient funds for when things do not go your way.
Making Money with Intelligent Investing
Today buying a property is not as easy as it once was and a lot of younger adults are waiting, happy to rent until they are ready for that commitment. In many cases prices are too high to enter the market and there are other factors like student debt.
However it is not just older generations investing in properties, a report from the National Association of Realtors shows that 34% in fact are younger than 36 years old. Investing in properties is something anyone can get started on as long as you are doing it for the right reasons and with enough resources.
It is important to remember though that making money this way is not a passive form of investment. It is not like a mutual fund where you can forget about it while it grows. You will need to work at it and if you are successful you can hope to see 6 to 8 per cent income a year from rentals, long term investing for capital appreciation might see 13 to 15 per cent a year.
Becoming a Landlord – Are You Ready?
If you are not going to hire a firm to take care of your tenants and their demands your investment property will require commitment from you. Are you ready for tenants calling at all hours, tenants that do not pay their rent on time, or even at all, complaints between neighbors, building maintenance and repairs and so on.
If you have a full time job and a family, becoming a landlord on top of that could be very difficult for you, and frustrating for tenants who are not getting your attention. Do not underestimate not just costs involved, but the time it will take from your normal life.
Pros and Cons of Buying a Property Investment to Rent
While I can offer you advice here on property investment it is still a very good idea to seek other experts out. Talk to your lawyer, bank, broker and such to assess where you are and what you are aiming for. If you do decide to invest in rental properties here are some pros and cons to consider.
- A monthly income you can use to cover costs of ownership and make a profit from.
- Pay less taxes as some expenses can be deducted.
- Diversifying your investments is a good idea.
- Being a landlord is more work.
- If you hire a company to do it for you that eats into the income.
- Re-sale can be harder when a property has been a rental.
Conclusion – Is Buying a Property a Good Investment?
Basically it can be as long as you are going into with security, are focused on the long term profit to be made, and in most cases are not living in it! Investment properties should bring in an income and help to secure your finances for a better future.
But how you manage them and buying the right properties in the right locations is crucial. Do the research that is needed and be prepared for the work. If you prefer your investments to make you money without much input from you, property ownership is not the best idea, unless you can afford to hire people to deal with it for you.
Some key points of advice I have to offer you are:
- Home ownership is great – it gives you security. But it is not an investment, it will not make you money.
- Investing in properties takes commitment and management.
- Property investment should bring in an income.
- It is a long term investment step not a quick money maker.
- Understand where you are buying and what properties are wanted.
- Use the advice and knowledge of the experts at your disposal.
- Make the investment choice based on facts rather than emotions or opinions.
- Have the money and a fund for just in case situations.
- Putting yourself in debt to invest in a property is not a good idea.
- Get the right mortgage.
- Is it the right time in your life for this kind of investment?
Before you rush in to property ownership assess your short term and long term goals, personal and financial. For some of you this is a great opportunity and buying a property is a great investment. But check your priorities first and learn what you need to know.Updated on: October 30, 2018