How to understand a property’s real value
Understanding value is at the core of smart property investment, from finance to planning, to tax and insurance.
Right Property Group’s Victor and Reshmi Kumar sat down with Property Investing Insights co-host Phil Tarrant to deconstruct the importance of value in property investment, which goes beyond just the purchase price.
Reshmi explained the benefit of considering how much money to put into an investment property and how much can be leveraged off it.
“With finance, what I find is a lot of people have this thought that if I put in a lot more of the deposit, my debt would be less, so my repayments would be lower,” she said.
“Whereas when we want to leverage, so what is the value of that money? What you could be doing is leveraging off that money so you could spread it across multiple investments, for example.”
She warned, however, that investors should be sure the investments are right for them and they are doing it at the right pace.
Additionally, Victor emphasised that price does not equate to value, with investors needing to understand not only why something is cheap, but whether it is cheap for their circumstances.
“Important question to answer is, is it cheap for the general population or is it cheap for you?”, he said.
“And then also understanding, people get caught up in percentages in terms of … 10 per cent growth, it has had a 15 per cent growth. But you also need to be looking at what base are you starting with?
“A 10 per cent growth of a 200k asset as opposed to a 10 per cent growth of an 800k asset. If both the holding costs were relatively the same, I’d have the 800k asset any day of the week.”
Reshmi also said investors need to understand the value of tax, and that trying to minimise their tax as opposed to maximising their wealth can be disadvantageous.
“So the value about that – understanding that when you’re creating wealth and you’re trying to avoid tax, you’re trying to do two opposites and it doesn’t work.
“You’ve got to really figure out what exactly you’re trying to do and where is your value in that, so that you can stop thinking about paying tax and think about creating wealth, and how you’re going to create that wealth when you’ve got to be paying tax.”
Finally, Victor said many investors would see insuring the property as an unnecessary cost when it is actually beneficial.
“So obviously insuring the property in terms of its replacement value, the ability to hold on would be ensuring your ability to earn the income and the property’s ability to earn the income,” he said.
“So they’re the three basic things, then you can add on to it depending where you are in life and where you are in terms of wealth, in terms of what other insurances, what other asset protection vehicles to use.”