Investing in property is a huge decision, and it may suit some investors more than others. Here are some things to keep in mind before you dive in.
It seems like everyone in Australia is leaping on the investment property bandwagon these days. And with historic low interest rates and soaring house prices, its easy to see why.
As a long-term investment, real estate has an obvious advantage in that the demand for housing will continue to grow as the population grows.
Remember - property is just that: a long-term investment - and it could be many years before you start to reap the rewards.
So is property the right investment vehicle for you? It all depends on your financial situation, your investment horizon and your current and future needs.
If your heart's set on entering the market but you don't want to commit to buying an investment property outright here's some good news. There are other investment vehicles available, such as managed funds and real estate investment trusts, which give you a piece of the property pie without having to buy the bricks and mortar yourself.
Why invest in property?
Property is considered to be less volatile investment than other types of growth assets, like shares. There's also more than one way to make money on your investment : you can generate a steady income by renting to tenants, and then hopefully turn a profit if you ever decide to sell.
And if the rental income you earn is enough to cover your loan repayments, you can potentially treat the property as a 'set and forget' investment while your tenants are paying off your mortgage.
There are also possible tax advantages associated with borrowing to invest, especially if you apply a negative gearing strategy. This is when your mortgage interest repayments (and other tax-deductible property expenses) are than your rental income, you can use this shortfall to reduce other taxable income, which in turn can reduce your tax bill.
Are there any downsides?
Of course, there are risks associated with every investment, including property. Property investment is not a one way bet and there can be extended periods where property values fail to increase or even fall in value, particularly outside capital cities.
Remember if you only invest in property, you're putting your eggs all in one basket, even more so if you are buying a single investment property, concentrating your risk in a single area and property type, a risk that investors in once booming mining towns are now familiar with.
More than just the price tag
Its not just the property's price tag you need to consider. There are plenty of other costs involved as well, from upfront expenses like stamp duty, legal fees, conveyancing costs and loan establishment costs. Ongoing expenses such as council rates, strata fees, property management fees and maintenance expenses. Selling costs such as conveyancing fees, real estate agent fees and capital gains tax.
If the rental income isn't enough to cover your mortgage repayments, it might help to reduce your tax bill but can also place strain on your cash flow. If interest rates rise or your tenants move out and you can't immediately replace them, you could be saddled with additional costs you haven't planned for. For negative gearing to work, the overall after tax and after costs gain on the property when sold needs to outweigh the amounts lost each year while negative gearing.
Keep in mind that a investment property isn't an asset you can easily convert to cash. If you ever need access to quick money it could take months to sell the property and you may be forced to sell for less then market value.
Alternative ways to invest
One way to get the benefits of property investing - but without having to buy a property yourself - is to join a managed fund that invests in Australian or international property. This allows you to leave the day-to-day managed of your investment to a fund manager with expertise in property investment portfolios.
Another option is to invest in an Australian Real Estate Investment Trust (A-REIT), also known as a listed property trust. Similar to a managed fund an A-REIT is a pool of investment capital that is used to invest in a shared portfolio of commercial and industrial real estate. Returns are based on the rent earned by the underlying property assets.
Because of the strength of this collective pool of funds, A-REIT investments can give you access to high quality properties like shopping centres and office complexes. You can diversify your property investments across multiple sectors and regions, reducing overall risk compared to a single investment property. Another advantage is that you can buy and sell units in the trust rather than an entire property - so you can cash in your investment whenever you need too.
On the other hand, A-REITs are listed on the stock exchange, your investment will be subject to share market fluctuations. So it's essential that you understand this and other risks, such as your exposure to debt, before going down this investment path.
General advice disclaimer - this blog contains general advice, It does not take into account your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This blog has been prepared by Count Financial ABN 19001974625, AFSL 227232.