Property investment has been the Australian standard for a long time now. Much easier to understand than the stock market (and far less nebulous), investing in literal bricks and mortar seems like a safe, sure thing. But nothing that good is ever that simple, and property investment still involves some careful research and planning to make sure that you won’t lose everything.
Let’s discuss some of the pros and cons of property investment to see whether it might be a good fit for you.
Steady growth/lack of volatility
While what’s true for one area isn’t the same as others, generally property is a less volatile investment over time than many stocks and shares. This means that not only are you less likely to lose money on it, but the value isn’t as likely to jump around all over the place either. Property is generally a safe, steady capital growth strategy; the goal is that the value of the property will increase over time as your renters more or less cover your mortgage.
That said, it’s important to know that there’s no guarantee that property values will go up, and that there are lots of factors that can impact price increases (or lack thereof). Even with property prices in regional areas booming at the moment, for example, location and the number of bedrooms are still important.
Okay, it’s not really trickery: deductions and negative gearing are not only completely legal but also good financial management strategies. Many of the expenses associated with an investment property can be claimed against your tax, which means that you’ll pay less. It may not completely cover those costs, but a little bit can go a long way. This is particularly useful if you’re in a higher tax bracket, as obviously the percentage of tax that you’re saving will be higher.
It’s that simple
Well, it’s obviously more complicated than that, but property ownership is something that you may already be doing. You don’t need to learn about dividends or how capital gains tax works on shares and investments. You don’t need to know what an ETF is or check whether you’re signed up for a rollover scheme or whether the dividends will be paid out (or work out what to do with all your CHESS statements). You pick the property, get the mortgage and find tenants (or find someone to find you tenants). Paying your bills is majority of what you need to do to maintain your investment.
Some areas to watch
We’ve made it sound pretty easy so far, but obviously no investment is without its risks, and property investment is no different. Property investment is different to share market investment because you need to tie a LOT of money up in a single asset. If you’re just looking to enter the property market for the first time, you’ll need to be willing to put a lot of money on the line (most likely more than you have) and make a commitment to stick to it. Being unable to service your mortgage will result in you being forced to sell your property quickly, which makes a loss more likely.
Some associated costs
There are two main types of costs associated with property ownership: purchase/establishment costs and maintenance costs. Your purchasing costs will not only include things like mortgage establishment fees and lender’s mortgage insurance, but also things like legal costs and conveyancing fees, as well as any other reports or services (like gardening or pest control). You’ll also have fees to pay on the other end as well, like commissions and advertising, so it’s important to remember that the sale/purchase price on the place you’re looking at is just a starting point for how much it’s going to cost.
Also, if your plan is that your rent will cover your mortgage, check and double check your maths, and your contingencies. There will be times when big things might happen to the property, and there may be times when the property is empty. What will you do in these situations, and can you cover emergencies as quickly as you’re legally required to? Do you know how much you need as an emergency fund?
For ongoing costs, you’ll need to pay rates and insurance, as well as your water bills (much higher for property owners) and any other associated costs. There will also be property management fees and, if you’ve bought an apartment, there may be strata committee fees to pay as well.
Nothing in this life is guaranteed, and the success of property investment is no exception. While the fundamentals of home ownership are always the same (i.e. pay what you owe and you’ll be fine), your particular circumstances will always impact the suitability of property investment for your situation. Hopefully this overview has helped you with deciding whether property investment is for you. Don’t forget to look through the rest of our blog to keep reading before you take the plunge.