Is property investment a good way to build wealth?
Investing in property has long been the Kiwi dream – it’s something known, tangible and continues to be a proven way to make money writes Lifetime’s Michael Karabassis.
Along with many of my friends and associates, the majority of my clients opt for property investment as a reliable way to build wealth. It is still considered the best way to achieve ‘passive income’– where you receive cash flow from something that doesn’t rely on your time or through minimum ongoing efforts.
However, such investment is a slow burn. It’s mostly a longer-term way to slowly build wealth and add to retirement savings.
Cantabrians who invest in properties in addition to their full-time job, might over time obtain two or three investment properties. If financed correctly, this investment could provide a substantial passive income every week. This can contribute to your retirement income so you’re not solely reliant on KiwiSaver – a great way to ensure their lifestyle can be maintained when they’re no longer earning a regular wage.
A quicker way to build wealth may be through property development by buying a house, renovating to add value and selling for profit. Once sold of course, this does not provide consistent long-term income. Done right, property development will give owners a lump-sum profit. We see a lot of full-time investors undertake some property development as this will often then provide a cash deposit to invest in longer-term income-generating projects.
As a result of the Reserve Bank’s announcement last year of changes for loan-to-value ratio (LVR) rules, property investors must have a 40 per cent deposit for any new properties. This is making it more difficult for existing “recreational” investors to keep purchasing properties as taking equity gained from an existing rental property to buy a new one often won’t cover the 40 per cent deposit.
When most people say to me that they want to be wealthy, what they really want is to be income rich.
However, these conditions bode well for current property owners who have paid off a considerable part of their mortgage and want to buy their first investment property. This is because they’ll have a lot of equity in their home to withdraw and use as a deposit for the new property. For those in this position, now is the prime time to invest, especially if your home is freehold.
For my clients in their late forties and fifties there is a common misconception that it’s too late to start property investment. I consistently tell them, it’s never too late. Although the retirement age is 65, for most jobs this is not compulsory and, even if you chose to leave full employment then there is plenty of time to make gains and secure a passive income for top-ups to any superannuation.
I also find that when most people say to me that they want to be wealthy, what they really want is to be income rich. Having money tied up in assets is pointless if you don’t have any money coming in. Property investment is a great way to ensure you have a continuous cash flow.
Remember, as an investor the risk to that cash flow can actually be decreased by investing in several properties. This is because if you have only one property and that becomes vacant, you then have a 100% liability. If you have two or three, if one property isn’t rented the cost of that empty property is covered by the income of the other two, after any required maintenance costs or other expenses.
Get advice, do some research, and consider investing in property now – it can be a great way to achieve long-term, consistent wealth.
Michael Karabassis is a mortgage and financial adviser (Registered Financial Adviser) with Lifetime Insurance & Financial Advisers and recommends that each person should seek independent advice.