Investment property: the pros and cons
Thinking about purchasing an investment property? There is actually more to consider than whether or not you can afford it. While managing an investment portfolio is a common goal among Australians, there are both advantages and disadvantages of property investment that you’ll need to think about. To help you in your decision, here are some of the pros and cons of investment properties.
What is an investment property?
As the name suggests, an investment property is a piece of real estate – more commonly a house, apartment or townhouse, but also including commercial real estate – that you buy for the intention of generating an income. This is achieved through rent, as well as appreciation of the property price when it comes time to sell.
You can decide to invest in a property alone, or you can join a group of other property investors to earn a percentage on any returns.
Investment properties are becoming more popular
Despite the current surging housing market, owning an investment property is a goal for countless Australians. In addition to superannuation and other investment types like shares, owning real estate is one way to potentially generate wealth over the long-term and potentially secure a more comfortable retirement.
According to the Real Home Shift report, in the 12 months leading into March 2021, around three in 10 (27.7%) Australians have already bought or are considering buying an investment property in a different area from where they reside within the next one to two years. Those in the community being invested into are currently seeing positive impacts on the local area as a result of investment property purchases and migration, with property value increasing (52.3%), increased diversity in the community (41.8%), improving amenities and local services (27.2%) and encouraging younger generations to stay (22.1%) being regarded as the greatest outcomes.
But it’s not always smooth sailing when it comes to property investment. You will also need to consider things like your ability to get an investment property loan, the cost of council rates, refurbishments, taxes, landlords insurance, and potentially property management fees. Also, past performance is no indication of future performance and the possibility of a down-turn in the property market always is a factor to be considered.
What does it mean to be a landlord?
In addition to learning about landlords insurance, many first-time investors don’t realise the scope of what’s involved after purchasing an investment property. If you don’t have the funds to hire a full-time property manager for your investment, you will need to take care of everything yourself.
Your responsibilities and obligations as a landlord will differ from state to state, but generally you will need to:
- Provide and maintain the property to a reasonable standard
- Maintain all records of transactions relevant to the property, including rental receipts for the tenant
- Pay property taxes and council rates
- Ensure security of the property (e.g. maintaining locks and security systems)
- Lodge a bond with the relevant state tenancy authority
Benefits of investment property
If you are seriously considering adding another home to your portfolio, here are some of the advantages of property investment:
- Stable asset: Because everyone needs a place to live, owning a home and residential real estate is typically seen as a relatively stable investment. It’s a way to ‘park’ your money into an asset that will hopefully appreciate in value over the long term while also earning you rental income.
- Passive income: Having an investment property can bring in consistent money without much intervention on your part. When you rent out your property, you can get income to cover the mortgage, taxes and more, depending on how much you lease it for. In the best-case scenario, property investors build a large portfolio that allows them to earn a passive income as a landlord.
- Tax benefits: There are a variety of tax benefits available to property investors, including negative gearing – where you can offset losses on your property against your income to secure a tax saving. You can also make a claim on depreciation, travel to property inspections and more.
- Financial freedom: The ultimate goal of property investment is being able to retire comfortably. With a relatively stable asset like real estate, you potentially can build your wealth over several years with the hope of transforming that long-term investment into financial freedom.
Drawbacks of property investment
Make sure you also take into account some of the disadvantages of property investment, including:
- Illiquid asset class: Unlike other investment types, such as shares, owning an investment property is relatively illiquid. This means it takes a long time to get access to your money. If you need to sell your property for whatever reason, it may take months to do so – not to mention the associated costs of putting a home up for sale and any taxes you’ll need to pay once sold.
- Ongoing costs: In addition to the high cost of entry, being a property investor has lots of additional expenses you’ll need to be mindful of. From mortgage repayments to council rates, maintenance and renovations, insurance and other fees, the money aspect should be a major consideration before you take the plunge and purchase an investment property.
- Bad tenants: You can do everything in your power to evaluate rental applicants for your property, but sometimes bad tenants simply slip through. When this happens, it can be a major headache for landlords to deal with – not only emotional stress, but also lead to potential financial stress with property damage and unpaid rent.
Consider your options and do your research
Whether you are ready to make a purchase right now or you are saving up for your first investment property in the near future, these considerations are essential to ensure you are investing in the right asset at the right time, and that you understand your responsibilities as a landlord.
When you do sign on the dotted line, consider protecting yourself and your new investment property with landlords insurance. You can request a quote with Real Insurance today or call us on 1300 049 131.
28 Apr 2022