Property is a favourite investment among many Australians, but is it the right choice for you? Here’s what to weigh up.
We look at five points to consider before committing to an investment property.
1. Are you investing for regular income or capital gains?
An investment property can deliver two types of returns – rental income, and potentially, long term capital growth. The type of return that matters most to you can impact your decision to become a property investor.
Rental income can be both regular and certain – that’s because the tenant signs a lease committing to pay rent for a set term. You can get an idea of the likely rental income by speaking with selling agents, or look at what similar properties in the area are renting for. Though be aware that there’s a possibility that your property could be vacant at periods of time, such as when a tenant moves out or breaks the lease agreement.
Capital gains are less predictable, and there is no guarantee you will make a profit on the sale of an investment property. In particular, past returns are not a guide for the future, yet many people rely on past returns when deciding to invest.
Property values can, and do, fall from time to time – figures from CoreLogic show home values in both Sydney and Melbourne dropped in May 2018. Yet not so long ago, these cities were enjoying nation-leading gains. The bottom line is that market conditions change and you can’t take it for granted that your investment property will dish up healthy capital gains, especially in the short term.
2. How long do you plan to invest for?
The length of time you hold onto an investment property can impact the likelihood of making a profit on sale. As a guide, residential property was the top performing mainstream asset over the 10- and 20-year periods to 31 December 2016. Moreover, a recent study by Aussie and CoreLogic found house values nationally have risen 412% since 1993 from $111,500 to $571,400.
It goes to show that the longer you’re prepared to invest, the more likely you may be to see decent capital growth.
3. How much deposit do you have?
Buying property is a major purchase, and you will generally need a deposit of about 10% though this could mean paying lenders mortgage insurance.
If you are a home owner, you may be able to use your home’s equity in lieu of a cash deposit. Talk to your Aussie Broker to know if this is an option for you. Bear in mind, you will still need sufficient funds to pay the upfront costs of buying property such as stamp duty, legal fees and any pre-purchase inspections.
4. Can you comfortably handle the ongoing costs?
Just like your home, investment properties need regular upkeep, and as an investor you need to consider if you can handle all of the ongoing costs of your rental property.
Along with repairs and maintenance, you also need to allow for rates, insurance, and management fees if you choose to use a professional property agent.
Investment properties can also attract another type of cost that home owners don’t face – and that’s land tax. This applies to rental properties in every state (the only exception is in the Northern Territory). As a guide to what you may pay, an investment property in New South Wales with a land tax value of $700,000 (as determined by the Valuer General) can attract a land tax bill of $1,236 annually.
Look at the rent you’ll receive from an investment property compared to the ongoing expenses. If there’s a shortfall between the two, consider whether you‘ll have enough cash flow to bridge the gap.
5. Are you comfortable taking on an investment loan?
Be sure you can manage the repayments on an investment loan – they can come with higher interest rates and stricter lending limits than regular home loans.
Good mortgage advice is helpful when it comes to selecting a property investment loan. Some lenders regard certain postcodes as having higher risk than others, and you may be asked to provide a higher deposit to buy in these areas.
There may be times when your investment property is untenanted – as a guide, the vacancy rate is 2.1% nationally. It’s a good idea to do the sums to see how your cash flow could cope if your property isn’t generating rent for any length of time. You’ll still need to meet the loan repayments (and other costs) associated with your investment property.
Any investment decision calls for plenty of research, and working through our five questions can help you form a clearer picture of whether an investment property is the right choice to help you achieve your goals.
When you’re ready to invest, speak to your Aussie Broker for help learning how much you can borrow and to find the right investment loan for you.