How to grow wealth with property

There is a range of strategies you can take to grow your wealth by investing in property and the plan you embark on largely depends on your situation and your goals.?

For the sake of keeping it simple, we are focusing on some of the common ways that people can make money through property. These include capital growth, cash flow, manufactured equity and profit on sale.

Capital Growth

Most wealth in property is created from capital growth. Let’s say you purchase a?Perth property?for $500,000 and it achieves an annual growth rate of 5%. After a year, the property would be worth $525,000. Meaning you have achieved capital growth of $25,000. In other words, your equity in the property has increased by $25,000.

(Just for reference: Equity = Value of the property - Loan Balance)

During covid times, we saw double digit growth in most Aussie cities. The same property might have grown by 15% in one year, meaning capital growth of $75,000! While this is not typical, occasionally booms do happen in the property market and that’s why holding your asset for a long period of time will expose you to the highs and lows.

In Australia, the average annual growth rate is 6.8% over the past 30 years (Core Logic, 2022), however every location is different with some doing better than others. With the old saying ‘property doubles in value every 10 years’, in order to achieve that you need 7% annual growth just FYI.?

Cash Flow

The next way to create wealth by investing in property is through cash flow. Typically when the rent you receive for the property is greater than your costs, then it’s considered positive cash flow and that money is your profit. Or call it passive income if you will.?

While positive cash flow is wonderful, you want to have a balance of capital growth as this is typically where most of the wealth is created. Properties that have higher cash flows generally have greater risk, more effort or lower capital growth (as a general rule).?

Manufactured Equity

The next way to create wealth by investing in property is to manufacture equity. There are a range of ways of doing this.

Firstly, renovating is a popular way to manufacture equity. To do this, you want the end result to be that a property is valued greater than your purchase price and renovating expenses. When taking this approach be careful not to spend too much money on the things that wont uplift the value of the property!

Another option is subdividing or developing - by splitting a block of land into multiple properties or constructing additional residences on the block. While a lot more complicated and riskier, it can give you great results.?

Profit on Sale

Profiting on the sale of a property relies on capital growth (or equity you manufactured). When it comes time to sell, any increase in value of a property is a nice tidy profit. This money can then be used to go on that dream holiday, buy another property or perhaps to use as cash for your retirement. Just be mindful that there are tax implications when you sell a property, so be sure to do the figures before selling or you might get a nasty surprise.

While these are the main ways you can make money from investing in property, usually the strategy of buying and waiting provides the least risk while achieving a solid performance.

Just noting that the above strategies are influenced by a range of variables. However, ensuring you purchase the right property, in an ideal location that suits your goals will make all the difference.

Using a buyers agent can help ensure you pay a fair price and ideally under market value which means you have created additional wealth before you even settle!

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