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Is Property Investment a Good Way to Build Wealth?

Is Property Investment a Good Way to Build Wealth?

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Investing in property has long been the Kiwi dream – it’s something known, tangible and continues to be a proven way to make money, writes Michael Karabassis.

Along with many of my friends and associates, the majority of my clients opt for property investment as a reliable way to build wealth. It is still considered the best way to achieve ‘passive income’ – where you receive cash flow from something that requires minimal ongoing effort and doesn’t rely on your time.
However, such investment is a slow burn. It’s mostly a long-term way to slowly build wealth and add to retirement savings.

Cantabrians who invest in properties in addition to their full-time job might, over time, obtain two or three investment properties. If financed correctly, this investment could provide a substantial passive income every week and contribute to their retirement income so they’re not solely reliant on KiwiSaver – a great way to ensure lifestyles can be maintained when there’s no longer a regular wage coming in.
A quicker way to build wealth might be through property development by buying a house, renovating to add value and selling for profit. Once sold, of course, this does not provide consistent long-term income. Done right, property development will give owners a lump-sum profit. We see a lot of full-time investors undertake some property development as this will often provide a cash deposit to invest in longer-term, income-generating projects.

As a result of the Reserve Bank’s announcement last year of changes for loan-to-value ratio (LVR) rules, property investors must have a 40 per cent deposit for any new properties. This is making it more difficult for existing “recreational” investors to keep purchasing properties as taking equity gained from an existing rental property to buy a new one often won’t cover the 40 per cent deposit.
However, these conditions bode well for current property owners who have paid off a considerable part of their mortgage and want to buy their first investment property. They’ll have a lot of equity in their home to withdraw and use as a deposit for the new property. For those in this position, now is the prime time to invest, especially if your home is freehold.
For my clients in their late forties and fifties, there is a common misconception that it’s too late to start property investment. I consistently tell them, it’s never too late. Although the retirement age is 65 (for most jobs this is not compulsory), even if you choose to leave full employment then there is plenty of time to make gains and secure a passive income for top-ups to any superannuation.

I also find that when most people say to me they want to be wealthy, what they really want is to be income rich. Having money tied up in assets is pointless if you don’t have any money coming in. Property investment is a great way to ensure you have a continuous cash flow.

Remember, as an investor, the risk to that cash flow can actually be decreased by investing in several properties. This is because if you have only one property and that becomes vacant, you then have a 100 per cent liability. If you have two or three, if one property isn’t rented the cost of that empty property is covered by the income of the other two, after any required maintenance costs or other expenses.

Get advice, do some research, and consider investing in property now – it can be an excellent way to achieve long-term, consistent wealth.