While many things motivate people to invest in property, working out whether it makes sense for you depends on what you plan to do with it and how it can help you achieve your financial goals.
We look at some of the risks, rewards and things to consider when buying an investment property.
Risks and rewards when running a rental
Even though it’s often viewed as a stable investment, real estate investing is not without its risks. Before you set foot into the market, it pays to take a holistic view of the situation.
Risks
Buying the “wrong” property. Whether to buy a house, apartment or holiday rental are all choices you have to make and it can be tricky to find one that will work perfectly for your investment goals. It may require work to find a property where you can get the best “rental yield” by maximising the percentage of your income relative to your overall costs.
Lack of liquidity. Buying and selling properties takes time and you may not be able to get your hands on your money if you need to sell in a hurry.
Negative cash flow. You can suffer from a lack of rental income if your property is vacant for long periods and this could affect your ability to make loan repayments.
Rising interest rates. Changing interest rates can increase your loan repayments and leave you with a more costly investment than you’d figured at the outset.
Rewards
Capital appreciation and asset security. Property prices generally increase over time and housing will always be in demand. Buying in a well-located and sought-after area will set you up with an asset that can outperform your other investments and eventually be worth a lot more than you originally paid for it.
Ability to earn income through rent. The rental return you receive from property investment can provide a significant income boost, especially with a competitive, low cost loan.
The tax benefits. Tax and depreciation advantages when you invest in property (including negative gearing) are perks that can make property investing more affordable.
To manage your rental or use an agent?
Real estate agencies often manage vast numbers of rental properties and can offer their services at a very competitive rate, making them an affordable option for many (and perhaps the most convenient).
Alternatively, if you have the time and skills to be hands-on, managing your own investment property can be satisfying and save you money. To make it easier, property management apps and online platforms are now available that automate the process and let you handle things from a computer or smartphone.
If you plan to manage the rental yourself (especially if you want to develop a portfolio of properties), it’s wise to think carefully about the workload, responsibility and legal liability risks involved.
Dealing with owners corporations
Investing in a strata-titled property doesn’t mean simply sitting back, doing nothing and waiting for the rent to flow in. While you own your own individual lot, you share ownership of the common areas like decks, stairwells, lifts, pools, gardens and any other shared facilities with the owners corporation (or body corporate).
Knowing the rules, reviewing the finances, and identifying what issues the owners corporation is facing now and down the track can all play a crucial role in the success of your investment.
Attending annual general meetings at the least, and even putting your name forward to become a member of your building’s executive committee, are also great ways to get involved and voice your concerns.
Property rental insurance costs
As exciting as it is to dream of financial freedom, new property investors need to consider how they will safeguard their assets and income, especially if they want to lease the property to tenants.
Getting adequate insurance in the form of a landlord policy can be the difference between an investment property paying off or becoming a financial burden.
Extra protection not typically included in standard home and contents policies might be needed to cover:
- loss of rent
- tenant-related damage
- building and contents
- legal liability.
Is property an ethical investment?
Property investment can be a genuine service to the community when it’s run in an ethical way with owners maintaining and improving the property, respecting the terms of the lease and following all the relevant legal rules and regulations.
More importantly, as a real estate investor you can help meet housing demand by providing properties to rent for others who can’t afford to buy themselves or by converting undesirable properties into liveable homes.
By talking to a lender who shares your values, you can start investing in property on your terms.
Keen to learn more?
Explore the range of Bank Australia home loans or read about what’s involved in borrowing to invest.
