The pros and cons of investing in the Australian property market and your options for building an investment portfolio using property...
Unlike buying a home to live in, an investment property is usually bought with the goal of making money. So, things that might be important when looking to buy a home (such as proximity to your workplace) might not be as important in an investment property.
There are many reasons why investing in property continues to be a popular choice and is often seen as one of the best ways to invest money in Australia. However, mistakes can be expensive, so it’s always a good idea to think about why you’re investing in the first place, and whether it fits with your set of circumstances.
Pros and cons of property investment…
Here’s a list of some things to consider when it comes to investing in property.
Property is a familiar and tangible investment that’s often easy to research and understand. It can also seem less volatile than other investments.
Plus, banks tend to be well-versed in property and often have a standard process to step you through.
Many of the costs involved with owning an investment property (eg advertising for tenants, fees paid on your loan, maintenance, etc) may be tax deductible.
Property investors can also potentially use the losses arising from negative gearing (where the income from the investment is less than the expenses) as a tax deduction.
Potential for long-term returns
Property can deliver long term returns if the value of the property increases over time. And of course, there’s also the potential to receive rent as a source of income before the eventual sale.
Positive gearing can be a long-term goal. Where the property income is greater than property expenses, it could provide the investor with a tidy side income.
Access to equity in your property
Equity refers to the current market value of your property, minus the amount you owe on the property.
For example, if your investment property is valued at $800,000 and you still owe $300,000 on your investment loan, you’ll have $500,000 of equity.
You could use this equity to secure a loan for another investment – such as renovations, shares or another property investment.
To understand the equity value in your property, you need to organise a property valuation.
More decisions within your control
Unlike investing in the share market, where the companies you invest in generally have their own management, you manage the important decisions for your investment property, including ways to increase its value, such as with renovations.
You can also take control of how quickly you pay down your home loan. This can help increase your equity in the property.
The cost of buying and selling a property
On top of the hefty price of the property itself, there can be a significant entry cost to investing in property including stamp duty, legal fees, building and pest inspections, and loan set up costs.
Before you get started, it’s smart to have a clear idea of how much you will need for the entire purchase process, and when.
Access to a local property investment expert to help you with your choice of property type and location is a good idea as well as having a finance broker to get the best loan deal.
There are also more costs to consider, when you decide to sell, including capital gains tax and real estate agent fees.
Although many investors focus on the positive impact of tax deductions when deciding whether to invest in property, it’s important to remember the potential impact of capital gains tax which you may be liable to pay. This is a key difference between an investment property and a home to live in, as paying capital gains tax is generally not required for the home you live in.
And when it comes to negative gearing, the success of this strategy comes down to the investor, the property and the rental income. If the investment property makes a loss, you are solely relying on capital growth to provide you with any investment return. It is important to make sure you have sufficient cash flow overall to fund this strategy, including the possible increase in the loan repayments if the interest rates increase.
A good property investment adviser can forecast these income and cost figures so you can calculate your cash flow and the future tax implications.
Another thing to keep in mind is whether you can afford it. Borrowing using equity will increase your debt levels and use your property as security. It’s wise to think about the long-term impact of taking on added debt and what the ramifications are if the investment does not provide the results you were hoping for.
It’s a good idea to seek professional advice before embarking on these strategies.
If you decide to make some physical changes to your property to increase its value, make sure you’re aware of how the changes will impact the value of your property and whether it’s worthwhile.
For example, if adding built-in wardrobes will cost you $15,000 but is likely to only add a further $10,000 value to your property, you might like to reconsider the extent of your renovations.