While investing is quite a popular way to invest less than 6% of Australians own an investment property. This is probably because navigating the real estate world can seem like a lot of work, and is often something people prefer not to get involved in. In addition, a lot of people don’t know how to invest in property.
However, investing in property is relatively straightforward. It is just a matter of understanding the terminology, and the steps you need to take before you make the final decision to invest.
What does investing mean?
The act of investing means to commit money to a project or activity in the attempt to earn money or profit from that endeavour. It is way of earning money in the future by plant the seeds with your money in the present. Investing secures yourself income for the future without solely depending on your salary as your source of income.
Investing is a smart way to use your money to plan for your future, by making wise financial decisions. Investing means putting your money away, with the intention for it to grow.
What can you invest in?
There are several ways you can invest your money. Depending on what stage of life you are in and what you are looking to get out of your investment will be a big contributing factor of determining what type of investment you will go with. Here is a list of the different ways you can invest your money:
- Shares:
- Property: investing in property is a popular form of investing for many Australians. Property investments allow you to receive a return on your investment as you receive money from rent.
- Bonds: investing in bonds means that you lend money to an entity such as a government or corporation to help fund a certain operation. They pay you back over a set period with interest. Corporate bonds often have higher yields than government bonds but they are also riskier.
- Superannuation fund: your superannuation is an investment. Is it made up of a portfolio of different investments such as shares, property and bonds which gain in value over time.
Get your finances in order before you invest
One of the most important things to do before you know how to invest in property is to get your finances in order first. There is no point making investments, if you are struggling to pay your off debts or are barely keeping up with your living costs. Here is a list of steps you should first take before making the move to invest.
- Get a good idea of your financial position – this means working out your budget. Track your living expenses for 1 – 3 months to give you a good idea of what you spend your money each month. This will allow you to have a clear idea of what your costs of living are so you know exactly what you will be able to save per month.
- Create some back up savings – this is good practice as it helps to protect yourself in case you were unexpectedly left without income. If you can save up enough money to cover your living costs at least a few months it will protect you financially.
- Pay off bad debt first – as mentioned above it important to get bad debt out of the way before you even consider investing. If you have any bad debt such as credit card debts, or any personal loans, it’s important to get these out of the way first.
What is property investment?
Investing in property is quite popular in Australia, and it is said be the oldest form of investing out there. One of the ways you can make money from investing in property is from the re-sale value of the property at a future time. If the property’s value increases you can sell it and make a profit. You can also increase the value of the property by doing some renovations to it, and selling it at a higher price.
You can also make income from property investments through the rent that you earn from tenants living or working on the premises. Having a tenant on your property and generating income through rent is the best way to get a return on your property investment, since it gives a regular income.
Knowing how to invest in property is a matter of understanding the various types of property investments. Here is a list of the various ways you can invest in property:
- Residential real estate – this type of property investment involves investing in houses or apartments intended for families to live in.
- Commercial real estate – this type of property investment refers to the buying of office buildings and renting them out to businesses.
- Industrial real estate – you rent out properties that are related to industrial processes, these include warehouses, assembly plants, distribution centres and manufacturing facilities.
- Retail real estate – this refers to property investment where investors owns shopping malls or shopping strips whereby tenants are restaurants, shops, hair salons and other retail vendors.
How to invest in property?
Before you invest in property there are a few steps you need to take first. The first thing to do is to look at your finances. List all your assets and work out how much you’ll be able to invest by working out your budget.
The next thing to do is to get pre-approval through your lender. Find out if you’ll get approved for a loan by checking your credit rating, and reducing your debt.
Work out what your financial goals are. Often people invest in property to secure their financial future, so they have an extra income to live on. By setting these goals it helps you to work back from them to help you plan how to achieve them.
Next is to understand what your risk tolerance is. This will help you to devise a strategy that is appropriate for achieving your goals.
Finally, it’s important to do some research so you can be as informed as possible about the investment choice you are going to make. Understand the market, and get as many valuable insights as possible.
Once you have made your investment it is also important to remain informed. Keep up to date with what’s going on in the property market.
How to invest in shares?
Now you know how to invest in property, another common type of investment is to invest in shares. This is where you buy parts of the company so you have a stake in the company. Though investing in shares seems like a foreign and complicated concept to some people would prefer not to go there. But if investing in property seems like too much of a hassle, investing in shares might be a good alternative. So, here we’ve put together a small guide to investing in shares.
Why invest in shares?
Investing in shares allows you to benefit from the magic of compounding. It allows you to multiply the money you invest, so that you get more money without having to work for it. Investing also helps you to protect yourself from inflation. Prices are constantly rising, which means that the value of money these days will be worth less in the future. Since investing allows you to benefit from compound interest.
What shares should you buy?
People might not want to invest in shares because they don’t know what to invest in. A good place to start is by investing in a company that you know. It could be one that you buy many products from, or that you use all the time. Another way to invest in shares is through an index fund. It is a diversified investment portfolio that allows you to invest in a mix of shares, bonds and real estate investments. This is a good way for the average person to start investing as the diversified investment portfolio means you are not putting all your eggs in one basket.
How do you start investing in shares?
The most common way to do it is through a broker or brokering service. Brokers can also be online brokering services and will have lower fees than a full-service broker (though they will give you investing advice). They will use one of Australia’s stock exchange platforms to trade your shares.
If you are just starting out, you could start with an online investment broker and you can invest as little as $500 to $1000.
Here is a list of some of the best online brokers in Australia that you can start with: Amscot, Belldirect and CMC markets.
Should I invest in shares or should I invest in property?
Now you know how to invest in shares and how to invest in property, you may be wondering what’s better? Some people think property is a better investment and others think shares are. So, which investment makes more money?
If you look at the investments on a short-term basis either property investment or investment in shares will show a higher return than the other. This is because it depends on the volatility of the market during the time that you do the comparison on. Many people that the share market is risky to invest in because it demonstrates high volatility. Though, the housing market shows a similar volatility over time. That puts them on a level playing field.
Thus, if you look at both investments on a long-term basis, while property does go up in value, so do shares. Though evidence shows that the value that property increases with over a 20-year period is much less, than the value that stocks increase over the same period.
Another point to consider is that the maintenance costs required for a property over 20 years could end up costing thousands, while the costs of maintaining a trading account is virtually zero.
Nevertheless, it doesn’t mean that you shouldn’t invest in property, but it might be a good idea to invest in both.
Investment terminology
To further help you understanding how to invest, whether it’s how to invest in property or how to invest in shares – here are some key terms that you should know.
Annual Percentage Rate (APR)
This refers to the total yearly cost of a loan. It includes fees such as service charges, loan fees, mortgage insurance and interest.
Appreciation
It is the amount that the investment goes up in value. Regarding property, it is home much that house is worth later. The opposite of appreciation is depreciation which is when a property goes down in value.
Capital gain
If you are trying to know how to invest in property, this is the term given to the amount that you earn, from your investment. In other words, the profit you have made.
Diversification
This refers to not putting all your eggs in one basket. An example would be an index fund as it is a mix of different types of investments. If you have made investments in shares and in property this is called diversification.
Equity
Equity in relation to property refers the difference between the amount you owe on your home loan and the total value of the property if you were to sell it.
Earnings per share (EPS)
This is otherwise known as dividends which is when a company
Lenders mortgage insurance (LMI)
This is an amount that you must pay to the mortgage lender if you do not have 20% of the deposit of the property. It is determined as a percentage of the value of the property.
Rental yield
The refers to the return on your property investment expressed as a percentage. It calculated by working out how much you spend per year on the investment, and how much you earn from it.
At the end of the day, choosing to invest in property or investing in shares is a matter of taking the time to understand the different type of investments. Before you invest, you should learn how to invest in property or how to invest in shares so that begin your investment endeavour being will informed.