Becoming financially secure isn’t about having a high income, it’s about having a passive one. You earn passive income regardless of how you spend your time, so it gives you freedom. Passive income is generated through investments – in businesses, in properties and in shares.
When it comes to investing in residential real estate in Australia, few people are more accomplished than Margaret Lomas. Margaret and her husband have built a portfolio of over 30 properties and for over 20 years have taught thousands of other Australians how to do the same. She is also the author of nine property books and hosts two property investment shows on Sky Business called Your Money Your Call and Property Success with Margaret Lomas. I recently read her book How to Achieve Property Success which is available for purchase here.
One of Margaret’s key messages is that from a financial standpoint “doing nothing” with respect to investing can actually be higher risk than taking the risk. I have provided an overview below.
The contention is that when you invest in property you either get something or you get nothing. But getting nothing leaves you in the same position as you would have been had you not invested in the first place. So it makes sense to invest.
According to Margaret having equity in your home is equivalent to having dollars under your bed. It’s doing nothing for you. Say you use this equity to invest, you are adding an asset (the new investment) plus a liability (the borrowing required) to your financial position. The asset will be equal to the liability at first, however the new investment should rise in value, making the asset exceed the liability (even when when you have not reduced the liability at all).
The worst case is that you have to liquidate the investment to repay the debt, and you will go back to having your original property with equity. Of course this equity may be reduced if there is a loss on the property. And there are also transaction costs involved which may put you behind further. But this is really the extent of the risk. The idea of “losing everything” is alarmist and unrealistic.
Furthermore, information and education can minimise the investment risk so that it is no greater than the risk of having a lethargic attitude and developing no investment plans for your future at all.
A decrease in property values does not result in any calls for repayment of the principal by banks, as can happen when you are using margin lending for the purchase of shares. This is because historically property is much more stable than the share market and other types of business investments.
Even if you make bad property investment decisions it has been rare to see property prices go backwards in Australia over the past 50 years. So the odds are heavily weighted in your favour, particularly over the long term.
