Investing in off plan property has so many benefits it’s hard to list them all! With well-chosen property assets, investors can enjoy tax advantages, excellent returns, predictable cash flow, diversification and you can even leverage property to build equity and wealth!
So, you’ve found yourself with some extra cash, and you’re thinking about investing in off plan property?
Here’s what you need to know about the benefits of off-plan property investing, why property is considered a good investment, and how you can get the best out of your property investment.
Property investors generate a passive income, through a mixture of rental yield and capital growth.
Some of the benefits of investing in property include tax advantages and looking overall more attractive and ‘safe’ to lenders.
Property investors make a passive income through rental yield and any profits generated by property-dependent business activity. Furthermore, capital appreciation also plays a part. With property values having a tendency to increase over time, and with the best property investment, you can turn a hefty profit when it’s time to sell.
Chargeable rent is also a factor that tends to increase over time, which can lead to higher cash flow. However, it’s wise to note that the amount of rent you can charge varies according to a number of factors, including wider market trends outside your control, and rents are not guaranteed. Also, factors such as location, asset class and management mean property investment returns may vary.
However, many investors aim to beat the average returns of the S&P 500, usually what many people refer to when they say, “the market”. Over the past 50 years, the average annual return over is about 11%.
Equity and Wealth Accumulation
Building equity is easily done in off plan property investing, as you pay off the mortgage, you slowly generate ownership of an asset that is part of your overall net worth. As you increase your cash flow and wealth even more, you have the leverage to buy more properties, as a result you build your equity and net wealth ten fold.
Leverage is an important factor in off plan property investing. Leverage refers to the use of various financial instruments or borrowed capital (e.g. debt) to increase an investment’s potential return. For example, if a mortgage with a 20% down payment, gets you 100% of the house you want to buy, that’s leverage right there.
Financing is also readily available within the property sector, because property is a tangible asset and one that can serve as collateral. You can also increase your mortgageability this way by portfolio diversification.
There are also numerous tax breaks and deductions that property investors can take advantage of, and some of these can save you vast amounts of money at tax time.
Deductibles include management and operational costs, as well as some of the costs involved in owning and purchasing the property. These can all help to make that tax bill a little smaller.
Diversification potential is another huge benefit of investing in off plan property and provides some protection against the risk of inflation.
Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time, potentially reducing the number and severity of stomach-churning ups and downs!
Property has a very low, and in some cases completely negative, correlation with other major asset classes, such as bonds and stocks.
Portfolio volatility can be reduced significantly with the addition of property to a portfolio, which gives you a higher return per unit of risk, and makes you more attractive to lenders.
Hedge Against Inflation
Property is generally a fantastic hedge against inflation because of limited supply, the intrinsic value, and the yielding nature of the asset.
When prices for goods and services are rising, assets such as bonds and cash will actually lose purchasing power. Property is an asset expected to maintain or increase in value during these inflationary cycles.
A positive relationship between GDP growth and the demand for property is essential for the inflation hedging capability of property investment.
The demand for property drives rents higher, as economies progress and expand, this is a way to pass some of the inflationary pressure on to tenants. This can be further translated into higher capital values which is great news for you.
Between the Lines
Like all investment opportunities, despite all the benefits of investing in off plan property, there can be some drawbacks. It is a long term investment strategy, rather than a high-risk “pump and dump.”
A lack of liquidity, or the relative difficulty in converting an asset into cash and vice versa has had many questioning whether it is the right move for them. Unlike a stock or bond transaction, which can be completed in seconds, a property transaction can sometimes take months to close.
However despite these concerns, property still remains one of the most tangible and safe asset classes to invest in. A process that’s simple to understand, offering stable cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation.
Property investment also offers you the opportunity to enhance the risk-and-return profile of your portfolio, lowering volatility through diversification.
Property prices and demand for rentals can go up and down, so property investments are suited for a long term strategy, this way you can ride out the losses in a slow housing market and earn profits again when times are better.
For more information on property investment, contact our team today.