It seems like everyone in Australia is leaping on the investment property bandwagon these days.
Investing in property is a huge decision, and it may suit some investors more than others. Here are some things to keep in mind before you dive in.
As a long-term investment, real estate has an obvious advantage in that the demand for housing will continue to grow as the population grows. But it’s important to remember that property is just that: a long-term investment – and it could be many years before you start to reap the rewards.
So is property the right investment vehicle for you? It all depends on your financial situation, your investment horizon and your current and future needs.
If your heart’s set on entering the market but you don’t want to commit to buying an investment property outright, here’s some good news. There are other investment vehicles available, such as managed funds and real estate investment trusts, which can give you a piece of the property pie without you having to buy the bricks and mortar yourself.
Why invest in property?
Property is considered to be a less volatile investment than other types of growth assets, like shares. There’s also more than one way to make money on your investment: you can generate a steady income by renting to tenants, and then hopefully turn a profit if you ever decide to sell.
And if the rental income you earn is enough to cover your loan repayments, you can potentially treat the property as a ‘set and forget’ investment while your tenants are paying off your mortgage.
There are also possible tax advantages associated with borrowing to invest, especially if you apply a negative gearing strategy. This is when your mortgage interest repayments (and other tax-deductible property expenses) are higher than your rental income, you use this shortfall to reduce your other taxable income, which in turn can reduce your tax bill.
Are there any downsides?
Of course, there are risks associated with every investment, including property. Property investment is not a one way bet and there can be extended periods where property values fail to increase or even fall in value, particularly outside of capital cities. It’s also worth remembering that if you only invest in property, you’re putting your eggs all in one basket, even more so if you are buying a single investment property, concentrating your risk in a single area and property type, a risk that investors in once booming mining towns are now all too familiar with.
When you’re looking to buy, it’s not just the property’s price tag you need to consider. There are plenty of other costs involved as well, from upfront expenses like stamp duty, legal fees, conveyancing costs and loan establishment costs (if borrowing to purchase the property) and ongoing expenses like rates or strata fees and maintenance expenses. When disposing of a property in the future you also need to consider conveyancing costs, estate agent fees, associated expenses and capital gains tax.
If the rental income you earn isn’t enough to cover your mortgage repayments, it might help to reduce your tax bill but it can also place a major strain on your cash flow. If interest rates rise, or your tenants move out and you can’t immediately replace them, you could be saddled with additional costs you haven’t planned for. For negative gearing to work, the overall after tax and after costs gain on the property when it’s sold needs to outweigh the amounts lost each year while negative gearing.
You should also keep in mind that an investment property isn’t an asset you can easily convert to cash. If you ever need access to some money quickly it could take months to sell your property and you may be forced to sell it for less than market value.
As with any major financial decision, it’s a good idea to consult with us before you decide to invest in property. We’ll help make sure you choose the right option for your financial needs and goals.
General advice disclaimer
The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Only financial planning advice provided by Ceebeks Financial Solutions is associated with MyPlanner Professional Services.
Chris Beks is a director of Ceebeks Financial Solutions and an Authorised Representative of MyPlanner Professional Services Pty Ltd, ABN 51 159 969 830; AFSL 425542 and is authorised to provide personal financial advice.