Both Den and I are committed to building our property porfolios as we see property as the best method for us to create wealth in the long term and to create a solid financial future for ourselves.
But it’s not all a bed of roses! If you have listened to a few of our property investing podcasts then you would know that we don’t sugarcoat it! There are times when I feel like just ‘selling up’ and cashing in – although, in my case, the bank still owns most of it, so that thought doesn’t stick around too long!
If you are someone considering getting started in property, then this article may help you to recognize the benefits and the drawbacks of investing in rental property as a wealth creation strategy, before you make your decision:
Investing in Rental Property – the Pros
Capital growth – This is the best advantage of all. You purchase a property for a certain value, you wait a while and hey presto, it increases in value. Capital growth is where you can really grow your net worth.
Rental income – The amazing leverage of using other people’s money to buy your rental property is coupled with the ability to use other people’s money to pay it off! In some circumstances the cost of your rental property to you could be zero dollars per month and it could in fact even put money back into your pocket!
Taking control of your financial future – If the thought of working your whole life and then retiring on a government pension doesn’t fill you with joy, then perhaps the thought that you can actually take an active role in creating the sort of future for you and your family that you want will excite you!
A means to create wealth that you could not achieve through just ‘working a job’ – When you work for an employer, in most circumstances, you know exactly how much you’ll earn for the year. There is limited capacity to increase that income and when it does it’s usually only by a small percentage on what you are already earning. Compare this with the potential for massive capital growth that will far exceed the growth in your salary. Compare this with the opportunity to leverage your existing investments to purchase others and compare this with the capability for you to earn income and experience increase in valuation where you may not have even lifted a finger!
Investing in Rental Property – the Cons
Dealing with bad tenants – Dealing with tenants who don’t pay regularly or at all, tenants who will more than likely not look after your property as well as you would and even tenants who can cause damage to your property. All of these things can really make you question whether having rental property is a good idea. It can cause stress for you, both emotionally and financially at times.
Having no tenants – This is an inherent risk of investing in rental properties. Of course you can do your best to pick the right area, make your property presentable, advertise well and attract tenants, but there will be times when your property is vacant. This can cause financial stress and the mortgage repayments still have to be met.
Tying up your money – For the most part you’ll need to put in a fair chunk of your own cash or equity. Having property means that you will usually have some level of your money tied up in what is not a highly liquid asset. So if you need to get some cash quickly, liquidating your property isn’t exactly a speedy process.
Need a significant deposit to get started – This is the one that holds a lot of people out of the game. Worse still, people watch the property market growing at times, much faster than they can save, so it can seem like an impossible task to even break in.
Potential for value fluctuations – As much as we all like to speculate and put forward our views on what the property market is doing, no know can be certain of how property prices will fluctuate. Sure, property prices are traditionally nowhere near as volatile as share prices, however, prices will go up and down.
Owning rental property isn’t for everyone, but there sure are some great benefits to be had. Ultimately the decision on whether you would like to hold rental property is up to you and something where you’ll need to assess the pros and cons before deciding if this is the strategy for you.
If you decide to go ahead and jump in, then good luck! If you think the bad side outweighs the good side for you, then don’t despair! There are other wealth creation strategies that use property and may not include some of these downsides – ever thought of developing?