Investing in real estate could be a great long-term strategy for some Australians but is not usually a get rich quick scheme. You need to know what you’re doing, do your research, have the resources to invest in the first place and to cover expenses if things don’t go according to plan.
Interest rates are still historically low, rental demand has picked up and property typically delivers consistent results over time and is less volatile than shares. As the equity in your property grows, you may even consider using that to purchase another without needing more capital and the real estate can be passed on to future generations. So, where do you start?
Before you buy, get your finances in order
Before you think about investing in property, make sure you have a steady income, a solid credit record, enough money saved for a deposit and a buffer to cover unexpected expenses and times when you don’t have a tenant.
You’ll need to pay for upfront costs like stamp duty, legal costs, conveyancing fees and search fees. If you don’t have a 20 per cent deposit, you’ll need to pay for lenders mortgage insurance (LMI) which will add to your costs.
Also, be prepared to pay a higher interest rate. Investor rates are typically higher than owner-occupier rates. Plus,you’ll need to factor in potential rate rises of up to 3 per cent, because that’s what the banks will be stress testing your finances at before approving your loan.
How to pick the right location for your investment property
Before you make a purchase, study the area. Look at recently sold prices and buy strategically, not emotionally. Check that the area has transport and reputable schools nearby and is well serviced by green space and other amenities. If people want to live here, you may be more likely to rent it quickly. Location can often account for a large portion of your property’s performance and should ensure a better return on investment.
Make sure to check for any planning proposals that could change the suburb and affect future prices. Rental yields took a hit during COVID when Australia shut its borders. But with our borders now open, rental vacancy rates have dropped and rents are on the way up. Good news if you have an investment property.
What tax benefits can property investors get?
You may be able to claim tax deductions on your investment property expenses but you will still needenough money to pay these upfront. You may be able to offset the interest on the loan and other costs such as council rates, water rates, landlord insurance, strata fees and repairs against the rental income. If your property generates less rental income than your expenses, you can offset those losses against your other taxable income including your salary. This is known as negative gearing.
If your property generates more income than your expenses, the property is positively geared and you will need to pay tax on the income.
If down the track you choose to sell the property and it has increased in value since you purchased it, you are likely to have to pay capital gains tax, particularly if you have never lived in the property. It’s worth getting some tax advice from a trusted accountant before you buy so you know what to expect at every step of your investment journey.
Is it better to invest in property or shares?
The answer depends on your appetite for risk, your investment goals and your current financial position. But if you can afford to do both, it may be one optionto diversify your investments and not tie up your money in one market.
Property is generally considered to be a less risky investment than shares. It may deliver relatively predictable cash flow, solid returns, tax advantages and is likely to appreciate in value over time. It can also be leveraged to allow you to buy another property without outlaying more capital. The value of the property can also be improved through renovations, however, it’s fairly inflexible if you need your money in a hurry. High entry costs, which include a deposit and stamp duty may also be a barrier to investing in real estate.
The share market, on the other hand, lets you buy a small parcel of shares for a much smaller sum of money, but it can be volatile and it’s difficult to predict the best time to buy and sell to maximise returns.
However, you can invest quickly and easily and take advantage of dividends. If you don’t need the income stream dividends provide, you may be able to opt into a dividend reinvestment plan that will see the number of shares you have grow. There are plenty of options to minimise your brokerage fees and shares can be liquidated quickly if you need the money. As events during COVID have shown, investing in shares can be a turbulent ride.
When is the right time to invest in property?
If you can start young when you have fewer commitments, greater flexibility and can afford to take a little more risk, you may be in a better position to leverage the equity in your investment property to buy another and build your property portfolio, potentially increasing your net wealth.
The housing market has gone through a recent boom, with the latest Australian Bureau of Statistics data showing a 23.7 per cent increase in 2021 across the eight capital cities. Sydney, Brisbane, Hobart and Canberra punched above the average, while growth in Perth was a more subdued 15.7 per cent and Darwin 13 per cent. Melbourne recorded 20 per cent growth.
Property isn’t likely to continue to grow at this pace though, especially as home loan interest rates rise. Rates are widely tipped to increase multiple times in 2022 and 2023 on the back of inflationary pressures. So, before you invest in property, ask yourself whether you can afford the repayments at a higher rate and still have a buffer.
While housing will always be in demand, because people need somewhere to live and supply is limited, ask yourself, can I afford to keep the property for 10 years? That’s the time frame some experts say you need to hold on to make it worth your while