Real Estate as an Asset Class
In Australia the changes in superannuation and retirement savings created a massive supply of investment funds or forced savings which made ordinary Australian think more carefully about how they can invest their money. In a country with such a small population and very dense urban cities real estate ownership has always been the great Aussie dream and with good reason – property appreciates in value. It satisfies several important criteria for any investment:
- It appreciates in value
- It earns income in the form of rent
- You can reduce your income from depreciation charges
Depreciation and expenses
Depreciation for assets like cars is a bad thing because that car is only worth the depreciated value. There are so many cars manufactured that are very similar to each other (ie. they are commodities) that they’re very easy to replace with something newer. Real estate is very different, every property is unique and most houses are unique and the cost of building a house depends on lots of different factors including location, land and materials used. As a result the benefit of investing in property is that you can claim the “accounting” cost of depreciation while benefiting from the value of the property increasing. Appreciation isn’t always guaranteed but Australia has had a very good run in property value for a long time.
Investment Criteria and Capacity
Real estate investment in Australia is driven by your capacity to borrow and that is determined by two main factors:
- Your savings (deposit), and
- Your capacity to repay the loan
I mentioned above that property appreciates in value (usually and particularly over the medium to long term) so if you’ve owned a property for a while, in an area that has experienced good growth, you’ll have a different kind of deposit called “increase in equity” so you just need to worry about whether you can repay the loan and that of course depends on what kind of return you can expect from your real estate investment.
Research and Forecast
Luckily these days information is all around us so you can get a fairly good idea of the cost to build (via quotes) and the expected returns (how much other rental properties are fetching), so you just have to feed this information into your spreadsheet. Do you have one? We’ve created one for you! Check later down the page.
Investing in a granny flat
A granny flat is a good investment because effectively you’re not paying extra for the land, you’re just using it better, more efficiently. So when you read that you can get a 23% return by building a granny flat this doesn’t take into consideration the initial costs (or value) for the existing property and land. The biggest questions you have to make now is what to build, how much will it cost me and what can I expect as a rental income.
We’ve created a spreadsheet that is yours to use for free and an education guide that comes with it that explains the steps to take. It’s a great way to explain to your bank/adviser or life partner the benefits of doing the granny flat development. Best of all it lays the information out for you to make an educated and well considered investment decision.
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This spreadsheet template and workbook is now available as a case study in our online Microsoft Excel Course (Intermediate Course 306)
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