Is Buying Investment Property a Good Idea? Weighing Up The Pros and Cons

Buying an investment property is a massive but stable decision – after all, everyone needs somewhere to live. Unlike buying a home to live in, an investment property is usually bought with the goal of making money – commonly through rent. Despite the current climate regarding interest rates in Australia, real estate has consistently delivered positive results over time. It can help improve cash flow, offer tax benefits and is seen as more secure than other investments. With that in mind, here is an in-depth guide weighing up the pros and cons, to assist you in answering the ultimate question: Is Buying Investment Property a Good Idea?

What is an Investment Property?

Simply put, investment property is real estate property purchased with the intention of earning a return on investment. In most cases, ROI is achieved through rental income or the future resale of the property. These properties include single-family homes, townhouses, condominiums, apartments, or commercial properties (e.g., commercially-owned apartment buildings or retail store locations). Moreover, to better understand an investment property, it is important to first understand the different classifications of residential properties:

  • a primary residence is a home you live in on a full-time basis.
  • a second home is a property that you live in a part of the time. This property may or may not be rented out when you’re using it
  • an investment property is a property that you don’t usually use for personal use. This is owned exclusively for generating rental income and/or an eventual profit on its sale.

An investment property is one that you plan to hold for either a long period of time for the purpose of a long-term appreciation or a short-term fix-and-flip property.

What to Look Out For in Buying an Investment Property

Location

One useful factor in assessing a viable location is to put yourself in the shoes of the prospective tenant. Proximity and convenience of location are generally one of the most important considerations to a tenant, right after price. Consider whether the property has easy access to public transport, schools, cafes and restaurants, and shops.

Condition of the property

The age of the property is a significant factor affecting your finances. This is owed to the property’s depreciation schedule which may also affect potential tax deduction claims. Undoubtedly, investment properties are an ongoing expense. Therefore, you don’t want to be losing money through maintenance costs. If you are considering investing in an older property, be wary that they may require substantial fix-ups. Make sure to get professional building and pest inspections completed before you make the final decision.

Type of property

Houses in comparison to apartments generally require more maintenance and are more expensive to buy and insure. However, the upside is they can produce higher rents and have higher capital growth. On the other hand, units or apartments start at a lower price point but note that strata fees will add to your list of maintenance costs.

Capital growth

Capital growth, sometimes known as ‘capital appreciation’ is essentially the increase in the value of the property over time. However, it is difficult to predict how residential property will perform in the future. Sometimes values drop, at other times values remain static. You will want to look for a long term trend of values steadily rising. Some important factors to consider include:

  • growth-trend indicators
  • median sale price for the location
  • has the median sale price increased or decreased over the last few years?
  • median rental income
  • demographic information

Is Buying Investment Property a Good Idea? Weighing Up The Pros and Cons

Costs

Purchasing an investment property is capable of producing a high ROI, but not without its risks. Ongoing costs of investment properties include:

  • maintenance costs
  • land tac
  • body corporate fees
  • building insurance
  • landlord insurance
  • council and water rates

Rental demand and yield

To assess the financial viability of a prospective investment property, it is beneficial to research suburbs with strong rental demand and high yield. Rental yield is a calculation that measures the profit you generate each year from your investments as a percentage of its value. The profitability is based on the expected rental income balances against the costs of owning and maintaining the property. These costs are inclusive of mortgage repayments, strata fees, council fees, insurance and maintenance.

To determine potential rental demand and yield you should focus on the performance history of similar properties. These factors are similar to those considered in capital growth above, however, also take into consideration the:

  • median weekly rent
  • potential growth rate
  • which types of property are in demand
  • vacancy rates

Advantages and Disadvantages of Buying an Investment Property

Advantages

  • access to equity in your property: while the process of selling a property in Australia is convoluted, it is always possible to leverage the equity gained in real estate to purchase a new house or attain a better refinancing deal.
  • more decisions within your control: in comparison to investing in the share market where you put your money in and have no control of what happens to it; investment property allows you to have complete control of the whole process (i.e., ways to increase value – such as renovations).
  • tax deductions available: many costs involved in maintaining an investment property may be tax-deductible. For example, you can claim a tax deduction for depreciation in the value of your investment property. If your interest and other costs are more than your investment income, you can take advantage of negative gearing benefits.

Disadvantages

  • ongoing costs: the overall costs of an investment property can quickly stockpile with additional costs such as legal fees and stamp duty. In addition, you may need to pay for a property manager or take out time to manage the property yourself.
  • lack of liquidity: unlike shares, the ability to sell your property immediately is highly uncertain. This is dependent on location, zoning and property type.
  • property value can drop: residential property prices fluctuate over a long period of time. Your investment property may decline in value right when you’re planning on selling it.
  • high entry cost: one of the biggest hindrances in property investment is the heavy financing required – a deposit alone can be quite high.
  • bad tenants: dealing with non-complying tenants can be a significant drawback for landlords. If tenants are consistently late on payments they can cause you substantial financial losses.

Key Takeaways: Is Buying Investment Property a Good Idea?

  • Start small: many property investors will begin with purchasing a small apartment or a house with a separate basement floor to rent out. The only downfall of this is that you will be living in the same building as your tenant. Nevertheless, this will give you a strong indication of whether you are financially and meticulously prepared to take on property investment. As you become more confident with managing an investment property, you could consider purchasing a larger property with a higher income appreciation.
  • Conduct in-depth research of properties: conducting your own research is vital. After all, it is your money and you want to know that you are investing in the right market. Gather information on the demographics of suburbs and their proximity to key locations etc. Keep an eye on the real estate portals such as realestate.com.au and PiPr’s soon to be launched consumer property portal.
  • Plan out all of your expenses: the maintenance of an investment property can become quite onerous. This involves keeping up with the cost of taxes, utilities, upkeep, and repairs. If you don’t have the time to maintain the property, using an agency company to deal with repairs and rental collection may be beneficial. However, note that this will increase your expected costs.

In this article, we have broken down the journey and difficult decisions that need to be made in buying an investment property. If done diligently, buying an investment property can produce cash flow and build equity, creating wealth over time without a huge initial investment.

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