Of course, an investment doesn’t stop on acquisition. You’ve got to find ways to nurture it and potentially increase its value. There are many ways you can do that, and there is a unique way to increase the value of each type of property. But of course, there would come a time that you’ve got to cash in on your investment. And when it comes to properties, you can cash in on your investment by selling it to anyone who is interested. Selling is a skill in itself and it can be developed with experience and proper training.
What is your investment property? To sum everything up, it is a complex system of practices and techniques that ultimately end in one thing: making a successful property sale and earning a profit in the process. You can strike gold in this venture if you do it the right way.
Houses and units seem easier to understand than many other types of investments.
However, it’s important to understand how investing in property works, to decide if it’s right for you.
Pros and cons of investing in property
Property investment is often seen as being less risky than other forms of investment. However, while it may seem more straightforward, there are pitfalls to be aware of. Here’s what you need to consider about investing in property.
Pros
- Less volatility– Property can be less volatile than shares or other investments.
- Income– You earn rental income if the property is tenanted.
- Capital growth– If your property increases in value, you will benefit from a capital gain when you sell.
- Tax deductions– You can offset most property expenses against rental income, including interest on any loan used to buy the property.
- Physical asset– You are investing in something you can see and touch.
- No specialized knowledge required– Unlike some complex investments, you don’t need any particular specialized knowledge to invest in property.
Cons
- Cost– Rental income may not cover your mortgage payments and other expenses.
- Interest rates– A rise in interest rates will mean higher repayments and lower disposable income.
- Vacancy– There may be times when you have to cover the costs yourself if you don’t have a tenant.
- Inflexible– You can’t sell off a bedroom if you need to access some cash in a hurry.
- Loss of value– If the property value goes down you could end up owing more than the property is worth.
- High entry and exit costs– Expenses such as stamp duty, legal fees and real estate agent’s fees.
Important:
There are restrictions on buying property through a self-managed super fund (SMSF).
Diversify your investments
Invest in more than just property so your money isn’t all in one market. If you invest in one market, it’ll increase your risk and means your portfolio isn’t diversified. See Choose your investments for how to find other investments to help you reach your goals.
Costs of investing in property
Buying, managing and selling an investment property can be costly and will affect your overall return.
Cost to buy and sell
Some of the costs involved to buy and sell a property include:
- stamp duty
- conveyance fees
- legal costs
- search fees
- pest and building reports
If you sell your property, you will have to pay agent’s fees, advertising costs and legal fees. You may also have to pay capital gains tax if the property has increased in value.
Borrowing money to buy
If you borrow to invest, you will have to pay the property mortgage. Don’t rely on rental income to cover the mortgage – there may be times when your property is empty.
Many people buy investment property with interest-only loans, but remember the interest-only period will end after a certain time. This means your repayments will increase to pay the amount borrowed, plus the interest. See interest-only home loans to find out how they work.
Costs to own an investment property
Ongoing costs of investment properties include:
- council and water rates
- building insurance
- landlord insurance
- body corporate fees
- land tax
- property management fees (if you use an agent)
- repairs and maintenance costs
Tax on your investment property
Although you may be able to claim tax deductions on expenses, you’ll still have to pay them up front. For positively geared investments, you may pay tax on your rental income.
Visit the Australian Taxation Office (ATO) for how tax works for investment properties.
What to consider when buying an investment property
Once you have a property in mind, compare the income you expect to your outgoing expenses. If there is a shortfall, consider whether you can cover it long-term. Also, work out whether you could cover all expenses short-term if you had no tenants for a while.
Research the property market to decide how to get an investment property. Where and what you buy will affect your return on investment.
Where to buy
- Areas you’re familiar with will take time to research.
- Look for areas with high growth, higher rental yield and low vacancy rates.
- Find out about proposed planning changes in the suburb that may affect future property prices.
What to buy
- Look for properties with appealing features like a second bathroom, a garage and access to schools, shops and transport.
- Consider maintenance costs based on property type, age and features.
How to buy
- Be wary of property investment advice from groups of service providers. Property developers, accountants, lawyers and mortgage brokers might recommend each other’s services.
Important:
You may have heard of property investment seminars promising to make you a fortune. These events often use high-pressure sales tactics to rush you into making big property investment decisions.
A real estate is an asset form with limited liquidity. It is not like the stock market where you can quickly sell shares if you need cash. You can’t instantly sell a house to pay for sudden and unexpected expenses. Real estate investing also requires a significant amount of money.
If these factors are not well understood and managed, real estate becomes a risky investment. And because investing in real estate involves putting a significant amount of money at stake, the losses can hurt.
Risk arises from uncertainty. Risk management for real estate investments involves limiting possibility. This requires ongoing diligence and a strategy that needs to be continuously monitored and adjusted as the market changes. But the rewards – an extra stream of income and the opportunity to build wealth – can be very much worth it.