We’re living in a digital age, where our environment pressures us to take shortcuts in order to succeed and deliver instant results. Long-term property investments are not functioning this way and patience is the most desired virtue a property investor can have. This is not the kind of business that will bring you the entrepreneur of the year award at your local startup hub, but it might bring solid returns in the long run and provide great financial opportunities for your family. Due to the housing shortage and widespread gentrification in major Australian cities, long-term property investments became even more profitable in recent years.
What types of property investments can you make?
Investors buy real estate for two major reasons: to sell it afterwards for the higher price, or to generate a rental income. The first group of investors is usually called ‘house flippers’, and depending on the trends on the local real estate market and the ROI they are trying to gain they might sell the newly bought property right away, or after funding its renovation or restoration works.
Investing in real estate for generating rental income is a long-term investment strategy, where investor leases the property to the tenant, who can use it in accordance with lease contract terms. This way the investor receives a monthly rent, which is similar to a stock dividend. Since many investors need to pay a mortgage, they usually charge enough rent to cover the mortgage expenses, and after the mortgage has been paid, the majority of rent instantly turns into profit.
You can also invest money in a property by purchasing real estate investment trusts’ shares (REITs). These are bought and sold on major stock exchanges, as stocks of corporations, which use investors’ money to purchase and run income properties. REITs don’t pay corporate income tax, which means that they need to pay out 90% of the profits (to investors) in the form of dividends in order to keep their privileges.
Types of properties you can choose
There are several property categories investors can choose from, and each one of those comes with a unique set of economic characteristics, rent cycles and lease terms. Real estate agencies usually classify properties under these categories:
- Residential property- is used for housing;
- Commercial property- is located in a downtown area and used for offices, company headquarters etc.;
- Industrial property- is located in the city outskirts and used for housing production and assembly plants;
- Retail property- is located downtown and other major shopping areas;
- Mixed-use property- is usually a building, for a residential, commercial and retail part.
Common property investment risks
Since real estate investments are often financed by debt, if things go poorly after the purchase, they can be disastrous for your portfolio, and credit rating. That’s why more experienced property investors use 50% debt to equity ratio when buying a new real estate. In order to minimize their financial risks, large and successful property investors, also tend to hire professional accounting and taxation services, so they can devote their full attention to finding good real estate deals.
Investors who rent their properties can also run into bad tenants, who miss rent payment due dates or desecrate the property. For this reason, lease contract needs to define all these specific situations and allow leasers to introduce late payment fees and other special measures that will minimize their risk.
Long-term property investing can bring solid monthly dividends and serve as a nice addition to your family budget. For some families, these investments also represent a way for gaining home ownership. By carefully choosing the best real estate deals and mortgage offers with favorable conditions, you can pay off several attractive properties that will easily support you during your retirement years.