One of the most common questions that new investors ask after buying a property is how fast they will be able to get the return. Will they be able to receive the desired profit and accumulate enough wealth over time? How about the future ability to achieve financial freedom? Is the portfolio going to do well achieving 80% growth in the next 7-10 years?
Of course, there are no definite answers to those question, as those things depend on many factors (including your strategy and market conditions). New investors often approach real estate with many misconceptions and little knowledge of the market. To help you understand these issues better, let’s have a look at some interesting facts below.
Sophisticated Investors vs Beginners
There is no doubt that real estate is a solid vehicle to create wealth and one of the best ways of investing your money. Most wealthy people worldwide understand that concept really well and keep buying assets, regardless of the property past performance.
On that level of wealth, people can invest in more profitable and large-scale real estate, such as apartment buildings, hotels, resorts, shopping malls, office and industrial buildings, which generally produce more profit, more equity, more rental income, and revenue on instant sale after adding value.
As many properties (both big and small) are constantly added to their investment portfolio, they are able to grow their wealth exponentially.
However, for the average 95% of the investors who still plan to build 5-6 properties, it is a very slow and not very profitable process in the first two cycles.
Over the long-term, those investors will be able to sell one or two properties and pay the overall debt to create a net asset- based equity and net cash flow. After that first stage, they can expand and reinvest in large-scale real estate.
The Waiting Game
Most properties in Australia are not very profitable and the process of accumulating wealth is long and slow. Most investors fail on that bumpy road as they lack patience or knowledge of the market, and unfortunately, they end up selling their assets before any significant appreciation.
It is worth highlighting that real estate which hasn’t been properly researched will grow over a property cycle at 0% to 30% on average. Strong properties will do well at 80% and more, but 8 to 12 years is a long and often frustrating waiting time that not many investors are prepared for. It takes perseverance and the right state of mind to bear the challenges of the journey.
High Cash Flow Risks and Alternatives
During the holding period, the rental gains are low, which creates another set of doubts. Most of us question the need to keep those assets while we can reward ourselves with diversifying portfolios, such as safe shares that distribute dividends or cryptocurrency, which can give you a net return of 8-14%. While I don’t feel qualified enough to provide financial advice in this area, I’m sure that this type of investment creates better cash flow by all means.
I mentioned other channels and ways of investing just to illustrate the slow process of generating profit in real estate. With properties on the first cycle or more, and until the rent adjusts over time to the property growth, it is hard to see any significant profit and thus many start questioning the real estate investment at this point.
Low Rental Income
To illustrate my point better, let me give you a real-life example. Most affluent suburbs in Sydney, North Shore or the East, produce less than 3% rental income. After all operational costs and mortgage, there is not much left. An insufficient reward of those investments is a real psychological challenge for many inexperienced investors.
Other suburbs and asset classes that can achieve 4% are considered good cash flow. However, as this is gross income, that leaves us with pretty much the same conclusion as before—there is not much left.
Units or Houses and High Tax Return?
Income generated by houses may be a little higher, as those properties don’t have the heavy strata levies and fees, they naturally tend to perform better. Units, on the other hand, will eat us alive as the strata and the maintenance cost will be a serious expense.
Developers and marketers offer formulas to save money with a high tax return. As much as it can solve the problem, it only helps investors to have an easy holding for the next ten years— nothing more, and usually they will still lose on those properties or experience a poor weekly cash flow in the first property cycle.
Navigating the Real Estate Market
There are no techniques of creating fast wealth through real estate, unless you are a developer or entrepreneur that can create instant equity on the land, add value to the asset, and receive high profit on the completed structure.
Don’t get me wrong, real estate is a very safe and solid investment. Those who will acquire multiple assets and manage to hold them for a long period of time will do very well and without significant risks. But you need to properly understand and investigate what you are buying in the first place, without any influence from the media, marketers, and various interests in a sale.
How to Invest Successfully
Every asset you buy should have a significant value that can stand still as a milestone in your property portfolio. You should analyse every purchase correctly, with the associated Risk and Return figures, and be physically present on the field. With proper analysis, you can achieve the highest capital growth expectations and keep the asset value in any market condition. Your rental income will stay solid, with a low risk of vacancies and fluctuations. There is no other way to succeed in real estate investing with average properties that only look good in the seller’s pitch.
I repeat, real estate is a safe way to create tremendous wealth. However, we need to apply the right approach first and keep in mind that it can be a time-consuming process. The importance of doing proper research, checking the property’s background and getting unbiased data, cannot be underestimated. Being patient and sticking to your end goal is the key to success in real estate investment.
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