With the permanent property rights, large area and good natural environment, Australian real estate attracts numerous investors, ranking the first all over the world in terms of attracting the rich. Does it mean that you can earn a great deal of money overnight?
Too many people get carried away by the beautiful stories they read in the news that how someone got rich overnight by investing in real estate, hoping to find an opportunity to get rich overnight and be worth tens of millions. In reality, a lot of people indeed would like to invest in Australian real estate to get a magic of getting rich quickly, even fantasy results. Unfortunately, those stories that have skyrocketed the wealth because of the miracle real estate investments don't make sense in real life for the vast majority of people.
We can truly feel from the recently released real estate data, although the housing price is still rising, the later buyers are in a high position to take over the market, and the early investors get quite fruitful results, we are really impressed by the charm of investment. For investors, rising house prices do not necessarily bring real gains to speculative short-term investors, but investors who can hold real estate for a long time can get huge returns.
Such news can often be seen, a common two-bedroom house in Melbourne could be bought $250,000 ten years ago while now the starting price is 7 million Australian dollars. The real estate appreciation potential is really huge, and this is a huge return on long-term investment.
There are two ways of returns:
Rent increase: rent increase can bring you long-term passive income;
Capital appreciation: increase in Equity can be used to expand the portfolio of investment.
In addition, investment in real estate can be assisted by external forces or other people's advantageous resources to achieve their own marketing goals or marketing effects, which is leveraging.
For example, if you take out a bank loan (Australian local buyers can usually get about 80% of the loan) to buy a house, the rent you get from renting out your house and all kinds of negative gearing will help you repay the loan together. In this way, you are using other people's money to improve your return on investment.
In the short term, Australian residential property is generally not a high-yielding asset. Most of the rental properties have a return rate of 3.5% to 5%, and a few can achieve 7% to 8%. Considering the high entry and exit costs such as stamp duty and capital gains tax, long-term holding may be the best and simplest strategy to invest in Australian real estate.
So how long does it hold for? For example, if you buy an investment home, hold it for more than 15 or 20 years, and wait for a huge long-term return.
Leverage - use other people's money to get rich
In most cases, your investment property will start transferring into a positive cash flow over time from negative gearing (please search the official account for negative gearing tax: how to help you reduce the tax and other relevant articles in our official account).
When exactly does it become positive cash flow? It depends on many factors, such as the economic environment, supply and demand, and interest rates. According to the research from housing industry association (HIA), there is a strong link between interest rate developments and rent changes. The logic is that if interest rates rise, the cost of owning property will increase.
So a lot of people are going to prefer renting to buying, therefore, rents are going to go up.
Because of this, the birth of Chinese landlords is to take advantage of the mentality of Australians not to buy a house, and then to be their landlords! In the past few decades, the long-term decline of Australian interest rate is the main reason why the capital appreciation of Australian real estate is much higher than the rent growth in the same period. Low interest rates make it more affordable for people to borrow money to invest in real estate, so it's still a good time to buy the property when the exchange rate is low, like right now.
(Official interest rate development, currently only around 2%, is already the lowest on record - source: reserve bank of Australia, June 2018)
Based on changes in interest rates over the past few decades, it can be predicted that rental returns and capital appreciation on your investment home are almost guaranteed to rise in the long run, and that the real value of the property or body corporate will probably still rise faster than the rental growth. If you bought an Australian property in the 1980s and have held on to it ever since, after the high interest rates of the 1980s, the gulf war of the 1990s and the introduction of GST in the early 2000s, and various market and policy changes, you should have enjoyed at least 10 to 20 times the appreciation.
(Comparison of mid real estate prices between 1980 and 2018 in five major Australian capital cities - data source: real estate institution of Australian, June 2018)
If the value of your home increases, take out some of the Equity (the difference between the value of your home and the amount you owe on your loan) to buy a car, pay for a vacation, or buy another home to expand your portfolio of investment.
The longer you hold on to your property, the greater the impact of compound interest growth on your capital. The more properties you own, the faster you can build Equity. However, most people actually lack the ability to hold real estate for a long time, and as a result, they can only miss the return of real estate investment. The reason is still the lack of professional real estate investment guidance, support and help.
In Australia, only a small part of the local people treats real estate as an investment product. According to the statistical data of Australian tax bureau in 2017, only about 8.5% of the population owns all or part of investment houses, and only 0.82% of the population owns three or more investment houses. In today's economic environment, it is difficult for an Australian to achieve financial freedom without at least four investment houses.