Deciding where to invest your hard-earned money is not an easy decision to make. While the stock market can seem attractive, with its promise of high returns, a quick glance at the volatility could make anyone uneasy. One of the best alternatives to the stock market, particularly for long- term asset appreciation, is investing in residential rental property. Knowing the advantages that investment property can provide will help you to make the right decision for your own financial future.
Hedge Against Inflation
Investment property can protect you from the negative effects of inflation, as the value of property increases with inflation. In other words, if inflation rises, so does the value of your investment property. On the other hand, inflation, especially if it’s unexpected, has been shown to negatively impact stock prices. Residential property is the perfect hedge against inflation, especially with consistent and rising rental income.
Greater Cash Flow
Another benefit of residential investment property over stocks is the significantly better cash flow that they can provide. Of course, some stocks do pay dividends, but these dividends are generally paid out on a quarterly, bi-annual or annual basis. Compare that to an investment property, which provides a consistent and stable amount of income on a weekly or fortnightly basis, and it’s usually higher than dividend payments.
This steady cash flow can be used:
- To make mortgage payments
- To pay rates and insurance
- To pay any operational and maintenance costs
- To reinvest in other property or ventures
- To add to your personal savings
The point is that a positive cash flow residential property means that you are guaranteed to have a certain level of liquidity and to receive an actual Return On Investment that isn’t just paper growth.
You’re in the Driver’s Seat
Investing in residential property also gives you a much higher degree of control. You can choose the type of property financing that suits you, as well as have the freedom to choose your tenants, decide on when to raise rents, choose who manages your investment property, and to decide to whom and for what price you’re willing to sell the property in the future. Stocks don’t offer nearly as much control.
Greater Availability of Tax Deductions and Benefits
Investment property also offer more tax deductions and benefits than stock investments can provide. Some of the expenses that you’ll be able to claim on your tax returns are:
- Property insurance and rates costs
- Interest on money borrowed to purchase the investment property
- Accountant and solicitor fees
- Property management fees
- Repairs and maintenance costs
Depending on the timeframe and your original intentions, you can even sell the property in the future without having to pay taxes on the profits, which means no capital gains tax.
There’s Less Risk Involved
Yet another advantage that residential investment properties have over stocks is that they come with less risk involved. Besides being a hedge against inflation, residential investment property is less volatile than stocks and they tend to hold their value. They don’t suffer from the rapid fluctuations like the stock market.
The non-volatile nature of residential property is one of the reasons why banks are so willing to lend you money for the purpose of investing in property.
Equity and Value Increase With Time
If you’re invested in a residential property, your equity will increase as your property value goes up. And while there may be downturns in the real estate market, over time property values all tend to increase. Your equity is the difference between the property’s market value and what you borrowed to pay for it. With regular mortgage payments, your equity will increase over time with or without capital gain. And historically, property has doubled every ten years in New Zealand, so capital gain is likely if you hold your property long term.
Keep in mind that you can also increase the property value through any improvements that you make to the actual residence.
A benefit of having equity is that you can borrow against it, which can allow you to purchase additional investment property. Your residential investment property portfolio can expand without you having to use much or even any of your own (cash) money, leading to your equity experiencing compound growth.
As you can see, investing in residential property has plenty of advantages over investing in the stock market. You have more control over your investment, receive steady cash flow, may be eligible for tax benefits, and have the possibility of experiencing greater long-term returns. Plus, you don’t have to avoid the news if the stock market happens to crash.
It’s never too late to start investing in residential property!