Sunday, May 5, 2013

Property Investment Why Invest in Property?

Property InvestmentProperty Investment Why Invest in Property? In every person’s life, there will come a point where he has to make choices, and one of which is an investment choice. Where should his hard earned money be invested in? What type of investments will give him the most returns with the least risk? A common investment that people make is property investment, reason being that property investment is seen as one of the safest and easiest option. This may also be because property would be more familiar, as almost everyone would have gone through the process of purchasing a home, thus people think that they understand property as an investment better. Many people think that a purchase of a property is

just a home purchase. However, the ‘home’ becomes part of a person’s overall investment portfolio. Property investments are usually considered alternative investments, supplementing a primary portfolio of stocks and bonds. One main difference about property investments is the factor of tangibility, often creating a substantial pride of ownership. Property investments have both bond and share characteristics, thus functioning like a hybrid investment. The rental income received serves as a ‘coupon’ payment of bonds. It also has stock like components, where the value of the property can appreciate and there is no fixed maturity date. What are the perks of property investment? The value of property in general tends to increase, and if a property is chosen wisely, the returns can be enormous. In property investment, the investor is in full control of the investment; all decisions are made by the owner of the property, for example when to sell the property or the amount of rent that the owner will accept. Property is also a rather safe investment. This is because property market is the only investment market that is not dominated by investors; hence there is a natural buffer in the market. Furthermore, there will always be a value to the property, unlike other investments that can reach a 0 value. Even if property values decrease, if you are able to hold it over a period of time, the value of the property will eventually increase. This is because, the property market moves in cycles. As can be seen in the diagram above, property values fluctuate overtime depending on the stage of cycle. However, ultimately, the value of property increases over time. Investments in property serves as a diversification tool, in statistical studies, it has been found that real estate has relatively low correlations with other asset classes. Furthermore, real estate provides yield enhancement, allowing higher returns for a given level of portfolio risk or even better higher returns while reducing portfolio risk. Some rental fees are indexed to inflation and hence serve as a hedge against inflation. More often than not, real estate income increases more quickly than inflation does, thus allowing the investor to maintain real returns. Lastly, if your property is negatively geared, it may provide tax benefits. Thus in general, property, relative to other investments brings about a regular return with lower risk. Factors to consider when investing in property Liquidity Although you can choose...

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