Investing In Property: Everything You Need to Know
Investing in property remains one of Australia’s most popular ways to build wealth. While property can be an effective strategy for building wealth, it’s essential to be aware of the realities before diving in.
Many view investment properties as low-risk assets, assuming they’ll always generate profit. However, like any investment, property has pitfalls to be aware of. In this article we explore what you need to consider before investing in property, from benefits and costs to potential pitfalls.
Pros and Cons of Investment Properties:
It’s crucial to not overlook the benefits and risks involved with investment properties but to become aware of them and learn how to maximise the pros and minimise the cons.
Pros:
Capital Growth Potential: Property is a long-term asset that has the potential to appreciate over time, allowing you to build equity and potentially make a substantial profit when selling.
For example: You purchased a property for $600,000 ten years ago. It is now worth $800,000. You have achieved $200,000 in capital growth
Tax Deductions: Many expenses related to investment properties are tax-deductible, such as interest on your loan, maintenance, and property management fees
Leverage Opportunities: Property allows you to use borrowed money to buy the investment, so you don’t have to fund the entire purchase yourself. This lets you buy a more valuable asset than you could with just your own savings, which can increase your potential returns if the property value goes up.
Physical Asset Security: Property is a physical investment that you can see and touch. This tangibility offers security that many people find reassuring, as it isn’t just a number on a screen.
Inflation Hedge: Property values and rental income tend to rise with inflation, making real estate a strong hedge against the decreasing value of money over time.
Cons:
Cash Flow Strain: Investment properties typically aim for capital growth rather than providing you with consistent cash flow. Rental income can offset some costs, but may not cover loan repayments and expenses fully.
Market Cycles and Volatility: property markets are affected by various economic factors. Property values can stagnate or fall, particularly in areas with high supply or economic downturns, impacting both value and rental demand.
High Entry and Ongoing Costs: Property comes with significant entry costs including stamp duty, legal fees, and mortgage insurance if borrowing more than 80%. As well as ongoing expenses for maintenance, rates, and potentnail vacancies can strain cashflow if not well-prepared.
Loss of Value: While capital growth is a benefit to property investment, it’s not guaranteed. If the property decreased in value over time, you might end up owing more on your loan that the property is actually worth.
Lack of Flexibility: property isnt ideal for liquidity because it’s not easy to access cash when you need it. Unlike some other investments, you can’t just sell a room like a bathroom if you need some quick cash.
What to Consider Before Buying an Investment Property
Investment properties work best when they are aligned with a clear financial strategy and sound cash flow. Here are four things to consider before taking the leap into buying an investment property:
Your goals:
It’s important to understand your goals and desired outcomes for your investment property. Are you aiming for long-term capital growth, tax benefits, or rental income? Investment properties are generally used for capital growth rather than immediate income, as rental yields often cover only a portion of ongoing costs.
Your Financial Plan:
Before investing in property, it’s beneficial to evaluate whether it aligns with your broader financial goals and strategy. Consider your current financial situation, future aspirations, and how property investment fits within your overall plan. Are you looking for long-term wealth creation, or do you need consistent cash flow? This alignment will guide your investment decisions and help you measure success.
Your Finances:
Properties can come with unexpected expenses such as emergency repairs or periods where your property is untenanted. To avoid strain on your cashflow, having a cash buffer can help cover these costs and allow you to maintain financial stability.
Market Research:
The property market varies widely, with many factors influencing the investment property you buy. It’s important to do your research and have a logical outlook rather than making emotionally driven decisions. High-demand areas typically provide lower rental yields but greater long-term growth potential, while regional areas may offer higher rental yields at the expense of slower capital appreciation. Additionally, the type of property you choose - be it apartments, units, houses, etc. - along with it’s location, will greatly impact your rental income and yield.
Costs Involved in Investing in Property
Before investing in property, it’s important to have an understanding of some of the initial, ongoing and selling costs involved so you can financially prepare.
Initial Costs:
Purchase price: The main cost of acquiring the property.
Stamp duty: A state tax on property purchases, which varies by state and property value.
Legal and conveyancing fees: Costs for legal assistance in the buying process.
Building and pest inspections: Fees for assessing the property’s condition before purchase.
Lender fees: Costs associated with securing a mortgage, including application and valuation fees.
Deposit: Typically 10-20% of the purchase price, paid upfront.
Insurance: Building insurance and possibly landlord insurance for initial coverage.
Ongoing Costs:
Mortgage repayments: Monthly payments on any loans taken out to purchase the property.
Property management fees: Costs for property management services, typically a percentage of rental income.
Maintenance and repairs: Ongoing costs for upkeep and repairs to the property.
Council rates: Local government taxes for property services and infrastructure.
Utilities: Costs for water, electricity, and gas, which may be covered by the landlord or tenant.
Insurance: Ongoing building and landlord insurance premiums.
Body corporate fees: Applicable for properties within strata schemes, covering common area maintenance.
Selling Costs:
Real estate agent fees: Commissions paid to agents for selling the property, usually a percentage of the sale price.
Marketing costs: Expenses for advertising the property, including listings, signage, and photography.
Legal and conveyancing fees: Costs for legal assistance during the sale process.
Capital gains tax: Tax on the profit made from selling the property, depending on your tax situation and how long you've owned the property.
Transfer fees: Costs associated with transferring ownership to the new buyer.
Property inspection fees: Optional costs for conducting inspections before selling to address any issues.
Diversification: Don’t Put All Your Eggs In One Basket
While property can be a valuable asset in your investment portfolio, relying solely on property is risky. By diversifying with other assets such as shares, bonds, or superannuation, you can balance your portfolio and reduce exposure to any single market.
Is Property Right For You?
Investing in property can be a powerful way to grow wealth, but it’s not without its risks. Make sure it aligns with your long-term goals, understand all associated costs, and diversify to safeguard against market changes. Consulting a financial adviser can help you assess if property fits within your broader wealth strategy, ensuring you’re prepared for both the opportunities and challenges that come with this investment.
About the Author
John Cachia is a seasoned financial adviser and dedicated parent of three boys. With a passion for financial literacy and wealth management, John has been in the industry since the young age of 14. His early start in finance has provided him with a wealth of experience and insight, which he now uses to guide families towards achieving their financial goals. As Australia's leading wealth adviser for young families, John is committed to helping parents become positive financial role models for their children, ensuring a secure and prosperous future for the next generation.
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