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Why It's Smarter to Invest in Business Rather Than Property
Any type of investment is a risk, but there are some more favourable than others. There are two main types of investments to consider: business investments and property investments. Business investments are considered a more favourable option over property investments for several reasons.
Business Investment Advantages:
When you invest in a brand, it’s understood that the business has had some level of success in the past and is well established. The advantage of investing in a business, whether it’s a hotel, motel or restaurant, is that it can be very profitable for the investor.
Also, with tourism rapidly increasing in Australia, certain industries are likely to experience increased growth, especially those in hospitality. Investing in Australian businesses contributes to the overall economic growth of the country while also creating jobs.
Business owners can earn a significant profit if the business is continuously successful. Business owners who invest in a brand name can expect to earn more than a property investor, since the sky’s the limit in terms of profits, as they’re generally dependent on how well the company is doing.
Property Investment Advantages:
One of the advantages of property investment is that you have control over most parts of the investment. The income you earn is likely set in the form of a lease, so it's less at the mercy of market whims. It doesn’t fluctuate and it’s not dependent on outside factors, like the number of sales a company made or how successful they were during a certain quarter. As a property investor, you have control over:
- How the mortgage is structured
- How much cash you’ll contribute to your property investment
- How you’ll improve its value to achieve a favourable rental return
- If you’ll manage the day-to-day operations of it yourself, or if you’ll hire a property management company
However you choose to manage your investment property, it’s definitely not a passive way to make money. If individuals invest in property, they’ll want to be actively involved in the daily operation or hire a trusted management company to take on this concern.
When individuals purchase an investment property, they’re buying a physical, brick and mortar asset. Many people are more comfortable with this as opposed to less intangible investment types such as shares or trusts.
Property Investment Disadvantages
Lots of Risks Involved
Any investment is a risk, but property investment, in particular, can be a risky undertaking. A big mistake property investors make is not understanding the true risk of their initiative. They have a mindset that property prices can only go up, but that doesn’t always happen. For example, leverage can help boost returns when it’s used well, but it can also hurt investors.
If a $500,000 property is bought with a $100,000 deposit, the owner benefits from the gains of a full $500,000 investment. If prices move up 5 per cent within a year, their initial deposit grows to $125,000 in equity with leverage, rather than $105,000. However, if prices drop 10 per cent, the house is now worth $450,000 and half of their initial deposit would be gone.
Have To Be Active In Its Management
Many investors don’t have the time to manage a property or overestimate the time they’ll be able to devote to it. Many investors may not know how to handle problem tenants and they’re also responsible for handling repairs and maintenance. Investors can hire out these services to a property management company, but then that cuts into their profits and income.
For further information, contact your nearest LINK Business Broking Office.