There are many options to potential investors looking to build wealth or financial independence: shares, bonds, additional super contributions, terms deposits, and countless others.
In this article we're going to take a look specifically at the pros and cons of investment property. This is a guide only and you should discuss your individual circumstances with your accountant and/or financial advisor before taking any action.
Benefits of investment property
Property is generally less volatile than other investments. We've all heard the expression "safe as houses" and there's a reason why! As housing is a fundamental human need, property will always be in demand, whether through renting or purchase. The same certainty of demand cannot be seen in many other investment options such as shares.
Owning an investment property enables you to earn income while the property is tenanted. Other investment options may provide an injection of cash when sold only, not enabling a means of generating income while being held.
In addition to the income received while an investment property is tenanted, the asset itself (if thoroughly researched, sensibly purchased and held for a period of years) will offer the benefit of a capital gain when sold. This growth in value can of course be accelerated through renovations and improvements made to the property. However even an unimproved property can experience significant capital growth if held for a long enough period of time.
Most expenses associated with the investment property can be offset against the rental income generated by the property, for tax purposes. Eligible tax deductions can include:
Property can be leveraged
This is certainly one of the most powerful benefits of investment property. No other investment vehicle enables you to leverage up to 80% of its value in order to acquire more of it to further build your portfolio. That is, once you own property you can borrow using the growth in equity and use this to buy additional property.
Property investment risks to be aware of
Entry and exit costs
Investing in real estate beings a significantly higher level of cost than many other investment vehicles. Entry and exit fees include stamp duty, legal fees, agent's fees and capital gains tax. Investors must also be aware than rental income may not cover mortgage repayments and other expenses such maintenance costs, rates, water services and so on, so investment property must be budgeted for carefully.
Changes in interest rates will directly impact mortgage repayment amounts. Property bought during a period of low interest may seem manageable however may not be financially sustainable if an investor's budget is tightly stretched and there is a rise in interest rates.
There are inevitably times when even the most stable investment property will be vacant. Marriage, divorce, change in number of family members living at home, change in employment and many other factors unrelated to the property can lead to a change in tenancy and temporary vacancy. During these (usually brief) times, the investor must be prepared to cover the costs of owning the property without the benefit of rental income.
Unlike some other investment vehicles, you generally can't sell off a portion of your investment property in order to gain access to cash quickly.
Loss of value
There is the potential that the value of a property may decrease over time, resulting in owing more than the property is worth (known as negative equity). If the property is well researched and bought in an established area, the risk of loss of value in the long term is relatively low.
Taking the first steps towards buying an investment property
Further information is available on the ASIC MoneySmart website to help plan for buying and managing an investment property.
As a property management business we frequently complete rental appraisals free of charge for owner-occupiers who are considering turning their own home into an investment property, while purchasing or renting an alternative property to live in elsewhere.
Contact us today for a free rental appraisal.
Carnelian Property Management Newcastle NSW
We are a family-owned and run Newcastle real estate agent offering expert property management across Newcastle and Lake Macquarie.