Investing in Property

Investing is a choice many people make at one point or another, in the hope of bringing wealth to their lives. Whilst there are many investment alternatives such as stocks, bonds and cash, property investment tends to be viewed as one of the safest and easiest options.

However, property investment isn’t for everyone. Thus if you are considering investing in property, it is important to weigh up the pros and cons.

Table 1: Pros and Cons of Investing in Property
Pros Cons
  • Capital Growth: The value of your property will grow over time and may be extremely beneficial financially if well chosen. Not only will you benefit from steady capital growth, but regular monthly rental returns
  • A safe investment:This is the only investment market which is not dominated by investors, hence creating a natural buffer in the market.It is also the most forgiving investment; if you purchase the worst house in the area, chances are that its value will still increase over time.
  • Mitigate risk: You can insure your asset against most risks; fire / damage / a tenant leaving, damaging your property or breaking the lease.
  • Anyone can invest: You do not have to possess a vast amount of knowledge, as you may with stocks or opening up a business.
  • Control: Unlike other investments, you are in full control of your property investment; you can make all the decisions and have control over all of your returns.
  • Tax benefits: Although tax benefits should not be used as a decision-making factor, it can be a benefit of investing in property. If your property is negatively geared, it may provide tax benefits.

Note: it is important to consult your financial advisor to seek advice

  • Liquidity: Although you can sell your property if things get tough, the process is not as quick as it is to sell other investments such as shares
  • Hidden and ongoing costs:  Along with the initial costs of investing in property (i.e. stampduty, deposit, legal and conveyance fees), you will need to consider the ongoing hidden costsof property investment such as fitting out the property, maintenance and repairs, buildingand landlord insurance, land tax, water rates, council rates, etc. Other investments such as shares do not incur ongoing fees.
  • Rent free periods: During the periods when you are unable to find a tenant and the property is vacant, you will need to cover the mortgage repayments.
  • Bad tenants: Problematic tenants are every owner’s nightmare. They can severely damage your property, refuse to make payments and sometimes even refuse to leave the property. Some disputes can take months to resolve and become very stressful, especially if there is an emotional attachment to the property.
  • Other costs: Although negative gearing may offer tax deductions, you will need to consider and budget for the shortfall between repayments and rental income as well as the cost to cover repayments when the property is vacant

What is negative gearing?

  • Negative gearing is a form of financial leverage where an investor borrows money to invest but the gross income generated by the investment is less than the cost of owning and managing the investment, including interest charged on the borrowings.

Guide to Investment Loans

The types of loans available for investment properties are generally the same as the ones available for owner occupied properties – you can avail yourself of the same interest rates, options and flexibility. The key to determining which loan is best for your investment property comes down to your investment strategy.

As with any large financial decision you make, it’s always wise to seek investment advice from a professional before entering into any property investment. There are plenty of people in the financial services and mortgage industries who can help you with this, your accountant, financial planner and MFAA accredited member.

The two primary ways in which investors build wealth through real estate:

  • Capital Gain
    This relies on the increase in value of the property to be more than the initial price of the property plus your repayments and buying and selling one-off costs. For example, if you purchased for $200,000, you sold it for $300,000 and your repayments and additional costs were $60,000 the gross capital gain is $40,000.
  • Building Equity
  • This relies on an increase in value of the property and bringing down the loan. For example, if you purchased a property for $200,000, and your loan was for $150,000 you would have $50,000 equity in the property. A few years later if the property was valued at $225,000 and you had $100,000 remaining on the loan you have $125,000 equity in the property. Plus you benefit from the rental return on the investment property.