The cost of living seems like it’s always increasing, our circumstances can change and the economy is forever fluctuating. We have to make savvy decisions now for our future.
Because of this, it’s no surprise that many people are searching for investment options that will help them gain more financial assistance and security.
Acquiring a property is one of those options.
Owning property is part of the great Australian dream and offers investors a lot of benefits.
It’s a fairly safe investment option, it’s not overly complicated and we are fortunate to have plenty of opportunities in this country to make this dream our reality.
While investing in real estate is a significant decision and longer-term commitment, it is one of the best ways to build wealth successfully.
Here are the 5 ways purchasing property helps you achieve financial freedom.
#1 Multiple Income Streams
Stop relying on one thing… yourself!
When you purchase real estate and lease it to tenants, you begin to receive a second income in the form of rent almost immediately.
In other words, you receive an income stream in addition to your normal employment salary or wage.
These funds can be used to pay back your mortgage, supplement your savings or go towards anything else you need.
Once you get started, you can then focus on improving the quality of that income (reducing expenses and/or increasing income) and improving the quantity of income (more properties equals more streams).
This secondary income can also come from a variety of sources, such as houses, townhouses, units, unit blocks, duplexes, dual occupancies, granny flats, commercial leases and more. It’s all about selecting the best opportunity for your circumstances.
Bear in mind that the rent you receive may not completely cover your home loan repayments and additional costs in changing markets, but with the right investment plan, you can use these multiple incomes to achieve financial
#2 Effortless Returns
Building on the previous advantage, when you have an asset that is generating a passive income, it means that this money is coming in without any time commitment from you.
Unlike your paid job, where you exchange your time in hours for a salary or wage, property continues to pay you without you having to lift a finger. Additionally, you have more frequent opportunities to increase this passive income with rental increases and multiple tenants, as opposed to attempting to get a pay rise at work.
When your income is only based against the time or effort you put into it, true financial freedom is hard to imagine. However, when you have tenants in a property you own, you will continue to receive rental income even when you’re on holidays or sleeping!
While initially, you want to focus on improving your personal income and savings to ensure that you can gain approval for mortgage finances, as you begin to invest well in properties that produce income, you will become less reliant on this personal income over time.
This will show you the power of property.
#3 It can grow faster than your savings
Everyone knows the importance of saving, but it requires extreme patience, consistency and discipline, and can feel like you aren’t making much progress.
Investing in property, when done right, can propel your savings to the next level. While investing is always a risk and the value can either go up or down, property values generally go up over the long term and outpace the rate at which you can save.
Leaving your money in a savings account where you receive regular interest is a low-risk way to store your money, but also offers you low returns. Over the last 20 years (from 1998 to 2018), returns from investments in residential property outperformed Australian cash savings accounts when earning interest at the RBA cash rate.
Over this period, residential property was around 9.6%1, which is the average annualised return from residential property. While a Cash Savings Account was around 4.4%2 based on the average annualised return of the RBA cash rate with interest reinvested.
It is easy to see why Australians prefer investing in residential property.
Of course, past performance is not necessarily an indication of future performance, however, this example demonstrates the difference and can help you get ahead much faster.
1 CoreLogic – Hedonic Home Value Index Australia with 3% net rental yield (capital returns, plus 3% net rental income, with rental income, reinvested back into the property). 2 RBA Cash Rate.
#4 The Tax Incentives
The Australian Government offers some major tax advantages to people who own investment properties, which include the following:
Depreciation, which is the lowering of the physical value of your property, such as the building or items contained within, can often be claimed back.
You can also claim back some repairs, maintenance and general expenses on your property and use these deductions to offset portions of your rental income. At times this can even extend beyond offsetting your rental income and even offset your personal income depending on the rental return and claimable expenses.
There are additional capital gains exemptions and you can often claim back the interest paid on your mortgage, amongst several other incentives.
While this general information shouldn’t be considered tax advice and you should always consult your tax professional before making a decision, these
are some of the benefits you may have access to by purchasing an investment property.
For some, it may be getting tax back and for others, it may be minimising the tax they have to pay. Either way, both improve your net income position.
#5 Create Future Wealth
Property gives you the opportunity to prepare for your future and set yourself up to be in an amazing financial position, both now and down the track.
This is because, after you purchase your first investment property, you can use its value growth (known as ‘equity’) to fund the deposit of your next investment.
As your property increases in value, your equity increases too, when added to your personal savings this means you can boost your overall funds for a second deposit, as your first property will help you buy your second. Once you do this, the above benefits potentially double.
Then, as the second property grows in value, you can use that equity to buy your third, and the 5 benefits can triple, and so on. This allows you to build an investment property portfolio where all of your properties are working together to support you.
Additionally, as your portfolio expands, you will begin to experience compounding growth. For example, a $1.5 million portfolio requires around 27% growth to gain another $400k in value, whereas a $4 million portfolio requires only a 10% overall growth to gain that same $400k. The 10% growth is far more likely, which means that a more sizeable portfolio will produce exponential wealth opportunities for you.