Investing in Property - Pro's & Con's
So you like the idea of buying an investment property, but where do you start?
Like any big decision a good place is by doing your research and trying to understanding the pro’s and con’s for you.
Firstly, why do people invest in property?
Well buying a property to rent out is a popular form of investment. Maybe you’ve had family or friends who have invested in property. Maybe you’ve just reached that place in life where you start thinking about the financial future.
Houses and units are easier to understand than many other types of investments, and they can be great long term investments, but they do have some issues you need to be aware of.
You might have also heard about the benefits of negative gearing
So what are some of the benefits of investing in property:
Property can be less volatile than other types of investment;
You can earn rental income if it the property is tenanted;
You can get capital growth if your property increases in value over time and you will benefit from a capital gain when you sell;
There are tax deductions as most property expenses can be offset against rental income, for tax purposes, including interest on any loan used to purchase the property;
You have a physical asset something that you can see and touch and this can be comforting compared to other forms of investing.
But like any investment, there are potential pitfalls:
The cost is one. Rental income may not cover your mortgage payments, or other expenses, so you may have to use other money to cover these costs;
Interest rates can go up and any increase in interest rates will increase your repayments and decrease your disposable income;
There may be periods of time where you don't have a tenant and will have to cover all costs yourself;
Property investment is pretty inflexible, you can't sell off a bedroom if you need to access some cash in a hurry;
If the value of the property goes down then you could end up owing more than the property is worth;
There are generally high entry and exit costs with expenses such as stamp duty, legal fees and real estate agent's fees making buying and selling property relatively expensive compared to other types of investment.
Another consideration is whether you are positive or negative gearing but what does this mean?
Essentially because most people will borrow to invest in property they are 'gearing' there investment. Negative gearing is where the income from your investment is less than the expenses. Positive gearing is where your income from an investment is higher than your interest and/or other expenses.
But why would you negative gear an investment property? Well the Australian Taxation Office allows investors to offset any loss against their income. This strategy is more of a tax strategy than an investment one given the aim of most investment strategies is to make a profit. Investors with negatively geared property either hope that one day the rent covers the loan costs or the capital growth in the property is such that they make a profit when it comes time to sell. This can be a reasonable strategy if capital growth can be guaranteed but you are essentially betting on capital gains. It may be better to save more for a deposit on a property so it that can then be rented for more than the weekly outlay. If it generates a capital gain, then that is a bonus, but remember to factor in capital gains tax when you sell.
There are other factors to consider before you enter into a situation where you are negatively gearing an investment property and they generally relate to you own unique situation, what works for a friend, colleague or relative mightn’t work for you, so making sure you get professional advice before considering this as a strategy.
In summary investing in property can be a good investment strategy but make sure you do your research, consider you own situation and get professional advice if necessary.
Still interested? Give me a call or email and we can discuss a loan that fits your situation. Getting pre-approval for finance before you find that property is always a good idea.