Benefits of buying an investment property
Sometimes it feels like every Tom, Dick and Harry has an investment property, but not you. And, statistics suggest a fair portion of Australians do. The Australian Taxation Office estimates one in seven tax payers own at least one investment property.
So, if everyone is doing it, it must make it easy, right?
Not quite. It can take months to research and find the right investment property. The buying process is complex, and the initial decision shouldn’t be taken lightly. However, there is some solace for existing home-owners in that the second time around always feels easier and less daunting.
The long-term gains can be significant. Historically, owning an investment property has provided high capital growth and has the potential to grow your net worth and provide you with a secure income. Property investment in Australia is also often seen as less risky than other forms of investment.
To help decide whether an investment property is for you, here are some of the main risks and benefits.
- Capital growth
Capital growth refers to the appreciation of the value of an asset over a period of time. It’s important, when looking to buy an investment property, that the value of the suburb/location is likely to increase in the future. Look for suburbs that have plans to support population growth, such as the addition of schools and train stations.
Do your research and you could find yourself buying a property below it’s real market value.
- Rental income
Ensuring you’ll receive a steady rental income stream is vital. You want to find a property that returns high rental yields. This will help you to cover mortgage repayments with the rental income you are earning.
- Tax deductions
A lot of property expenses are tax deductable, such as advertising to prospective tenants, fees paid on your loan and maintenance costs.
If your rental income is less than your expenses, your property is negatively geared. In this scenario, you may need to speak with a tax consultant as an investment loss will reduce your overall taxable income, ultimately reducing the tax you would pay.
If you’re just getting on the property ladder, download our First Home Buyer’s Guide for more tips and tools.
- Get on the property ladder
If you’re not a home owner already, buying an investment property is a great way to get on the property ladder, whilst renting in a suburb you love. More first home buyers are choosing an investment property as their first stepping stone to home ownership.
- Property prices dropping
Unfortunately, like most investments, there are no guarantees and property prices could fall at a time you may need or want to sell. It’s important to realise that property investment is a long-term strategy, it involves buying and holding the property until it matures.
- High entry and exit costs
Stamp duty, legal fees and insurance costs can be expensive when purchasing an investment property, there are also exit fees that need to be considered such as, capital gains (see tax implications).
- Rise in interest rates on your repayments
Ensuring you can always afford your repayments is important. You may want to consider fixing your mortgage, this way you’ll know exactly how much you’re paying for the next few years.
- Tax implications
The good sometimes comes with the bad – you need to consider the impact capital gains tax could have on your overall profits.
Research, research, research
If investing in property sounds like the right thing for you, you need to start asking yourself some questions:
- Who are my target tenants – families, students, couples?
- What is important in terms of location – schools, transport, development?
- Will you buy an old or new property?
- How much maintenance am I willing to contribute?
- How much of a deposit do I have?
- What are my finance options and how much can I borrow?
By doing your research, you’ll be able to maximise your property investment returns, starting with an affordable loan that’s tailored to you and your investment strategy.
When deciding which home loan product is for you, it’s important to consider what additional features you would like included with your home loan, e.g. an offset account or extra repayments without penalty – deciding this first will ensure you’re getting the best deal.