Persuasive
argument for real estate investment
The Police Journal this month begins a new real estate section
and is delighted to welcome Real Estate Institute president, Robin
Turner, to its team of regular contributors. Robin will cover a wide
range of real estate issues, and is happy to take questions from readers.
Taking steps to ensure their future financial welfare would no doubt
be uppermost in many police officers’ minds. Essentially, there are
three classes of investment: real estate, cash and equities (antiques,
works of art, precious gems and metals, and collectables are specialist
fields not considered mainstream investments).
There are persuasive arguments for and against each of the classes,
but let’s consider real estate.
The bricks-and-mortar investment is a highly popular one, because
people receive something very tangible for their money. Plus, residential
letting is seen, quite properly, as a reliable income stream. The
trick is, of course, to select the best property available in your
price range.
Location, position, address – call it what you will, but location
is vital because it is the prime determinate of growth in value. Some
investors buy for cash flow, others primarily for capital growth,
with the balance looking for a mixture of both. Returns on real estate
are directly related to risk. The very best properties in the strongest
areas will yield a lower return – sometimes as low as 2% net, while
outlying or run-down properties may show as much as 10% net.
Interestingly, some of the outlying properties have the greatest
swings in value. Some canny investors have indeed done well by specializing
in buying these at the low end of the swing and selling at the higher
end. In other cases, they have simply collected them as opportunities
have arisen, and thereby ensured a sound cash flow from eggs in several
baskets.
If you want to enter the real estate investment scene, do your homework
– very thoroughly. While price is important, it is far less important
than the actual return on your invested capital, and the propensity
for capital growth.
The natural temptation is to buy a home unit in a good area as a
foothold in the market. There are thousands of people who would be
very glad they did that, given the huge increase in values we have
seen recently.
However, for one to buy a unit at today’s prices, one would have
to question the return, and the likelihood of substantial further
gains in the foreseeable future, for what is essentially a right to
occupy a space.
A better plan might be to buy an older home on a larger allotment,
which has divisional potential. One can receive rent from the home,
and take comfort in the knowledge that, as pressure on land resources
increases, this property should show good growth beyond inflation
– in other words, a real return.
Another plan might be to seek out homes on corner allotments, where
a backyard could be hived off to create a courtyard allotment. Sometimes,
investors buy adjoining properties to achieve this goal, with very
good results. The State Government has made its intentions on urban
consolidation extremely clear, so we will see a lot more of this activity.
Real estate investment is very desirable because it provides security,
and a sense of wellbeing. “No pain, no gain” is a hackneyed phrase,
but so true. It takes a lot of work and enquiry to find the property
which suits your needs and budget.
As well, you will have to sacrifice other income to make up the difference
in your bank interest and other costs from the rent you receive. Once
you’re over that hurdle, however, and there is solid equity in your
investment, you can move on to a second, and more, properties.
