PROPERTY INVESTMENT BENEFITS• Capital growth in the long term as property value increases. Property markets move in a cyclical fashion due to inefficiencies in adjustments of demand supply and prices. In the long term though, it is widely believed that there is a secular upward trend of rising property values. However, caution is needed when selecting locations and properties for investment purposes because this secular trend of rising property values may not apply to every property at any location. During periods of rapidly rising property values, capital growth is one of the major property investment benefits. • Income from renting the property is also one of the main property investment benefits. Under normal property market conditions income returns from property can range roughly from 5% to 10% depending on property type and location. • Some expenses associated with property investments such as depreciation on the property and interest borrowed funds that are used for the acquisition of the property may be tax deductible. • Positive leverage is another potential benefit of investing in property. Investors can enjoy the benefits of positive leverage when the use of borrowed funds increases the return on the investor’s own funds used for the completion of the transaction. However, this is not always the case, because it will depend on the cost of borrowed funds and the income return and after tax capital gains that the investment will eventually produce for its owner. The best way to analyze the potential for positive leverage on a property investment is through the use of the discounted cash flow model, which can take into account the timing and size of the expected after tax-cash flows, which incorporate and the perioding mortgage payments. If the income return and after tax capital gains are not high enough then the use of borrowed funds can actually have a negative effect on the ultimate return on the investor’s own funds. The above property investment benefits need to be evaluated against the major risks associated with property investments, which include: • Capital losses due to decline in property values and due to circumstances that may lead the owner to liquidate the property at a value lower than the cost at which it was acquired • Negative cash flow when the income produced by the property is not sufficient to cover operating expenses and mortgage payments • The risk of losing the property and any cash invested in it due to default on mortgage or tax payments and subsequent foreclosure. • Significant time on the part of the landlord if he acts also as the property manager
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