This series of articles is for the beginner investor. It’s designed as a set of articles that will cover the basics of getting started in investing. It’s also appropriate for those who may wish to revisit their overall goals and investing strategy, after all, many of us have started out as the ‘accidental investor’ and developed our knowledge and strategy along the way.
In part 1 of the series we’ll be covering ‘Getting your head right’ – which looks at why you want to invest, the successful mindset of the property investor, your risk profile and setting your property investing goals. Today’s post specifically look at why you would invest in property.
Let’s get cracking!
Why invest in property?
People invest for a variety of reasons, using a variety of investment vehicles and in a variety of ways! For most people investing is about accumulating wealth and even though when you ask people why they want to accumulate wealth you may get a bunch of different answers, for the most part, it comes down to being able to buy the things you want to buy and, more importantly, do the things you want to do.
For me, investing in property is about buying back my time. It means not having to work in a job that I may not want to be in just because I need to pay the bills, it means building up enough income producing assets to be ‘financially free’ which means instead of working for a living, I can spend my time doing the things I want to do.
We’ll take a closer look at your motivations a little bit later, but firstly, let’s talk about why people invest in property as a primary investment vehicle.
There are a many different ways to build wealth through various forms of investments. There are savings accounts and term deposits, shares and managed funds, business investments and of course, there is property.
Savings Accounts and Term Deposits
The main advantage of these items are that they are very low risk and keep your money safe and accessible. Of course, the main trade off for a low risk investment is a relatively low return, however, for many people this suits them and the concept of low risk is more important.
Shares and Managed Funds
Shares are often considered a fairly risky investment. This is because although they can offer high returns, their volatility means that they can also drop in value quite quickly and you can lose money. Investing in shares yourself means that you must take the time to educate yourself about shares and share trading or investment strategies or you can pay for that service from someone else. Managed funds are a way to handover all of the choice on which shares to buy, how many to buy and when to sell, to a third party fund manager. You also pay fees to a managed fund for this service. Many people invest in shares through their superannuation fund and until recent years, shares were really one of the only types of investments that a superannuation fund could make.
Many people build or invest in business to build wealth. Many people build a business without really thinking of this as investing, but in reality, building a business is also investing and businesses can, like other investments, produce cashflow and capital growth. Building a business, of course, is a big undertaking and is also relatively high risk.
Property has a lot of advantages as an investment class.
- Easy to understand – sometimes, getting your head around shares can be difficult and learning to invest in shares requires a lot of knowledge. Investing in property also requires knowledge but property is, for most people, easy to understand and deal with.
- It’s real – you can touch it, see it, paint it, photograph it! Many investors, like myself, like the idea of having something tangible for their money.
- You can improve the value of it – unlike other investments where you really are just a passive observer, with property you can take the ‘bull by the horns’ and manufacture your own capital growth, through renovating, developing or even thinking of creative ways to use the property. This is a really exciting part of investing in property.
- Property is forgiving – the volatility of the share market can be scary for many and thankfully, changes in property values are not as dramatic or fast as you see in the share market. Of course when share pricing are rising sharply it can be very exciting, however, when they drop quickly it can be heartbreaking. With property growth is often far more gradual and although decreases in value do occur they are not as great.
Why do YOU want to invest in property?
So now that we’ve looked at property as an investment class, let’s look closer at why YOU want to invest in property, what is your motivation? You see, at the end of the day, owning 5, or 20 properties is usually not what it’s all about and when things get tough, like you’re trying to save for a deposit, or you have to cut back on your budget or you have some dodgy tenants that are giving you grief, then thinking about how many properties you can have or how much money you can accumulate is not something that will drive you. To understand your real motivations you need to go a little bit deeper than that and think about what your real motivation is. The things that drive me are:
- Not having to work for an employer
- Being able to spend my days doing things that I enjoy
- Being able to spend my time with my young children
- Being able to enjoy holidays and time at the beach house
Having property to me is just the means to the end. I want to be financially free of my job and be in control of my time and my financial future. That motivates me.
How about you?
Before you get started, have a think about what your primary motivation is.
- What is important to you?
- What would change if you didn’t have to go to work to pay the bills?
These are the things that will really motivate you.
In the next section of this series, we’ll be looking at the success mindset and why this is important to you!