finder.com.au speaks to managing director of Metropole, Michael Yardney, about why you should build wealth from a young age.
When it comes to investing in property for the first time, you may feel like you’re in over your head. Lacking in disposable income and investment know-how, your chances of surviving the property market as you compete with cashed-up investors may seem slim.
Rest assured, investing from a young age provides you with the power of compounding, where time is your trump card.
While investing early on demands a different approach and mindset compared to investing when you’re older, you can reap significant financial benefit – and for longer – if you invest cautiously.
Why invest from a young age?
1. Compounding over time
The greatest advantage that young property investors have is time. Not only do young people have more years to learn about property investing strategies and markets, but they also have more time to recover if they make a poor investment decision. For instance, if you purchase a rental property when you’re 20 and you end up making a loss from the purchase, you have time to learn from your mistakes and recover- it’s a learning curve.
CEO of Metropole Property Strategists, Michael Yardney, says that if you're nearing retirement and you make a poor investment choice it can be more difficult to recover.
“We believe people should get onto the property ladder sooner rather than later because of the power of compounding,” he says. “In other words, if you want to invest in property now, over time it will double in value.”
2. Financial benefit
Some of the main financial benefits of investing in property from a young age include:
- Maximise cash flow: One of the objectives of property investing is to increase cash flow, or the money left over each month after expenses have been accounted for. Generally, cash flow will increase over time as rent increases, while your repayments will largely remain the same, and the mortgage will be paid off as you gain equity in the property.
- Appreciation: The longer you own an investment, the more it will appreciate in value. While the opposite is also true – the property could potentially decrease in value – it’s likely that it will increase in value again if you own the property for long enough. The median house price increased by 14.1% in 2014 in Sydney alone.
- Diversify your portfolio: Over time, you can buy several investment properties to build your wealth. The sooner you buy your first income-producing asset, the sooner you can diversify your portfolio and buy other investment properties.
- Negative gearing and depreciation: As Yardney suggests, young people can benefit significantly from negative gearing and depreciation associated with real estate over time: “Many young people are using investment properties as a stepping stone, as it may be cheaper to own a rental property than a home. The repayments are subsidised by the rent and you end up getting various tax benefits such as depreciation and negative gearing.”
Unlike other forms of investing, such as share trading, property investing provides you with a high degree of control. For example, if you get your property revalued and find that it has increased in value considerably, you could potentially charge higher rent.
Yardney explains: “As you get on in life, your personal circumstances change. You may get married and have two incomes, but then you may have kids and drop to one income. If such a situation arises, property investing allows you to let the magic of compounding work in the background.”
What are the risks?
- Unexpected expenses: You need to be prepared for unexpected expenses by ensuring that you have enough funds to cover contingencies. For example, if your tenant suddenly vacates the property, it may take a while to find another tenant, which means you’ll forego rent for a period of time. As a young investor, you may not have experience managing cash-flow which is why it's important to carefully plan for unexpected costs that may arise.
- Property value: While an investment that’s situated in a good area with infrastructure and nearby facilities is likely to appreciate over time, there is a chance that the property could decrease in value. This market risk may harm your capital growth over time, however this risk can be lessened through diversification, or by investing in different property types across different states.
- Time-consuming: Managing a rental property takes time. You need to research the market and find a good property, advertise and find tenants, create a rental agreement or lease, design a budget for expenses and so on.
- Liquidity risk: A savvy investor knows that they should have an ‘exit strategy’ in the event that they suddenly need to sell the investment. This risk is associated with the idea that you may be unable to sell a property should the need arise. To manage this risk, you should invest in an area with strong demand and positive buyer sentiment.
- Economic risk: Although the Reserve Bank has eased monetary policy in recent times, and with a historically low cash rate of 2%, interest rates are predicted to rise early next year. This interest rate risk means that the cost can increase for a variable home loan.
- Buying the wrong property: Unless you engage in thorough research, you risk purchasing a property that will not meet your investment objectives.
In order to minimise these risks, Yardney says that you should educate yourself and surround yourself with a good team.
Young property investors should also treat their portfolio like a business: “They should treat it like an enterprise where each property is their employee and it should be checked once a year to make sure their employee is behaving.
Investing in property for the first time can be exhilarating, and there is no better time than when you're young. Just make sure you determine a long-term investment strategy, consult the right professionals and conduct thorough market research so you can make the most of your wealth creation.
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