While property predictions remain positive, leasing your home as an investment property could be a smarter move than selling.
The benefits of investing in property
So just how good is the rate of return on an investment property? According to recent figures from the Australian Bureau of Statistics (ABS), the property market in Australia has been rising steadily over the past decade, with an average annual growth in prices of 5.8%. This steady rise supports the general opinion that property is less volatile than other types of investments like shares.
Of course, some areas, particularly in major cities, have risen much faster, making them magnets for property investors seeking ever higher investment property ROI (return on investment).
As well as growth in the value of your property – known as capital gain – you’ll also be receiving income through renting your property. And depending on your financial position (other sources of income, marginal rate of tax, etc.) you may benefit from tax deductions based on the costs of owning and leasing your property, contributing even more to your overall investment property rate of return.
Will my home make a good investment property?
Before you commit to leasing your current home, check if it meets the criteria for a sound property investment. If it’s in an area with a record of strong growth in values, that’s definitely good for capital gain. But you should also look at rental yield – how high local rents are compared to property values – to determine whether your rental income will cover your financing and maintenance costs. Rental vacancy rates are important too, particularly if you’re relying on the income to cover mortgage payments.
Other things to consider include how appealing your property is to the local rental market. If it’s close to local transport and retail hubs and has features like parking or a second bathroom, it’s likely to be popular with the majority of tenants – whether they’re couples, families or retirees.
Can I afford not to sell?
Using your current home as an investment property can pay off in the short and long term, as long as you’ve got the cash flow to make it work. You’ll need enough equity in your current property – the value of your home, less what you owe on it – and income from rent and other sources to afford loan repayments on the original property, plus any rent or mortgage you’ll be paying for your new home when tenants move in. It’s worth getting expert financial advice before you make a decision to make sure you’re going to be better off as a landlord.
Do I want the responsibilities of being a landlord?
Even if the numbers add up, make sure you’re ready for your new role as a landlord. If you’re reluctant to take on the burden of finding tenants, organising repairs and collecting rent, you can engage a managing agent to do this for you. Of course this adds to the costs you’ll need to pay on the property – along with insurance, water, council rates and maintenance.
Have you leased your home to start an investment property portfolio? Tell us about your experiences in the comments below.