Property Investment - What's the Point?

If all else fails you can live in it.

I have heard this piece of advice being given out when it comes to investing in real estate. It is a true statement and worth remembering, however it ultimately provides no insight as to why it can be one of the single best decisions in any ones life. The following should hopefully look a little deeper into finding out; what actually is the point?

The first question I would ask before diving into the complex world of property investment is simply, what is it I am actually trying to achieve? I think we can all agree, the root to that answer is to make money, however money can be made doing lots of things. You can make money simply by working harder, getting a promotion, selling stuff you don’t need, investing in stocks and bonds, maybe even selling a kidney...? So what is it about real estate that makes it stand out as a tried and true way to make that elusive gold we all crave?

In short that answer lies in three things. Passive income, leverage and tangibility.

Passive income. We know how to make money by going to work, but how good would it be to make money while you sleep?

Now there are two different avenues here; Rental Income vs Capital Gains, and although they are not mutually exclusive of each other there is an important difference. The importance is centered around the first question at the top of the page. What is it I am trying to achieve?

Everyone has a different answer to this question, but for me, I am a lifestyler. I want to spend my time on this planet doing the things I love and experience as much as I can. I love my work, but I love my passions more. Financial freedom is the goal and passive income is the answer.
Because of this I am looking for a rental property which provides me an income stream and is ultimately cash positive. Again there is an important junction here, there is income through long term permanent tenants (longer than 3 months tenancy) and income through short term tenants (shorter than 3 months stay, often right down to nightly rentals).

And again you need to go back to the original question. For me, time and lifestyle is the importance so I'm going to stick with the former and try find a property that provides a stable long term income with the least amount of my own time input.

The best way to evaluate this is through a simple spreadsheet and essentially treat it as a balance sheet. I am going to itemize and tally up all my property expenses;
  • Monthly mortgage payment
  • Property taxes
  • Purchase costs (lawyers, real estate fees etc)
  • Insurance
  • Maintenance
  • Vacancy periods (missed rent between tenants)

And balance it against my property incomes;
  • Rent
  • Tax breaks and depreciation (this is a whole other rabbit warren, but worth getting your head around)  

From this you can conclude many things, however broadly you are trying to work out your ROI (Return on Investment) to see if all this effort is actually going to achieve anything.  At this stage it is worth pausing and taking the time to really understand the numbers. There are gems out there that look like lemons and vice versa. Emotions can also come into play here and it is important that you remove yourself as much as possible from how much you like the colour of the curtains and focus on the goal at hand! I know it’s hard to get excited about that old grey downtown duplex with a basement suite around the corner from that stuffy office complex, but chances are it’s going to net you more money and be less maintenance than that beautiful lifestyle property on the edge of town. Paying real attention to a property’s ROI brings me to the second reason why investing in property is a winner.

Leverage. Why not gather up all your hard earned cash and give it to a stock broker and tell him to go at it? Although this can also be a good road to travel, (and it is great to diversify your investment portfolio) it doesn’t take advantage of any leverage.

Say I have $100,000. I could take that 100k and throw it into a range of stocks in the sharemarket and if I’m lucky i might make around say an 8% gain on that money, meaning that after 1 year I now could say I made $8000. Now instead, if I take that 100k and go to the bank and borrow another 600k I can now buy a house for $700,000. At this point I am leveraged 6 times over, so if I have done my research and bought a property that is cash-flow positive or neutral (rent pays the mortgage) and I make 8% in the property market, then after one year I have made $56,000. Of course there are a lot of factors at play here, but in this example I would make 7 times more money by investing in real-estate. Not bad.

Tangibility. Chances are you live in a house, your parents live in a house, you visit your friends in their homes. You live in a neighbourhood full of houses. You go parties and discuss the homes for sale on your street.  I guess my point here is self explanatory but it is important to remember that if you are going to part with your hard earned cash, you may as well know at least something about what you are dealing with - and real estate is tangible. Stocks can be great, but do you really know the inner workings of that company your buddy gave you that hot tip on? Do you get to make any decisions, or do you sit on the board? Chances are you don’t and you are therefore at their mercy.

With real estate you call the shots, you make the decisions and as a result you get the benefits before they are watered down to the shareholders. You can stay in control of what is going on, you get to appoint your own tenants if you wish, you get to decide if you want to renovate or add value, you get to decide if it’s a good time to sell and you get the pleasure of knowing that you have more than a few numbers to review on a screen.

It’s a satisfying feeling owning property, it is something you can relate to and as the old saying goes - if all else fails you can live in it.