Buying your first home is an exciting and often emotional day, and is a proud moment for many hard working Australians. Once you’ve owned your own home for a few years, it’s a good idea to start thinking about property investing for the long term wealth and tax savings that many Australians are taking advantage of.
We know that purchasing your first investment property can be overwhelming, and so below we have answered some of the key questions first time investors commonly have and the main topics to think about before diving into the world of property investing.
What makes for a good property investor?
When it comes to making sound property investment decisions you need to keep your emotions in check. Unlike buying your own home where you’re invested emotionally, when buying your first and subsequent investment properties, it’s best to keep your emotions as far away from the decision making process as possible. Liking the shades, or worrying about what the neighbours are like isn’t anywhere near as important as focusing on the key drivers of what makes real estate and property investing tick.
Instead, with some due diligence and critical research, you want to find an investment that is going to give you the highest return possible with the lowest potential risk, and that doesn’t cost you your lifestyle to hold on to!
Is a rental property a good investment?
While we were growing up many of us have been told that property is a strong, long term investment, and for your typical time poor, working Australian, this is true. Historically within Australia, during times of economic upheaval and instability, property has usually held most of its value and continued to grow over the long term, unlike many commodities and often stronger than other investment vehicles such as shares.
According to the ASX/Russel Investments 2015 Long-term Investing Report, residential property outperformed shares over a 20-year period consistently. Purchasing an investment property in one of Australia’s capital cities should allow you to see steady growth on your purchase price. This is because in general, property prices in our cities double every eight to ten years. So if you’re planning to hold on to your investment property for a while, you should see a good return.
What are the risks?
There are many variables when it comes to property investing, however if you’re mindful of some of the risks below, and have a plan, property investing can be a much smoother (and safer) journey.
First off, many Australians are concerned about having an expensive second mortgage that drains their cashflow and lifestyle. One key thing to remember is that unlike your family home, an investment property will have a tenant who is paying you income every week. With the cost of the loan, body corporate insurance, rates and maintenance, you’ll still be out of pocket every week, but nowhere near as much as with your own home.
Further, in Australia there are a number of good tax breaks and government incentives for property investors, and the out of pocket expenses you pay for on a property are often tax deductible. This is called negative gearing, and basically it allows you to pay less tax while you lose money on your investment property. When structured properly, the cost of owning an investment property can be as little as a few coffees a week assuming you have a high demand, strong yield investment.
How can I minimise risk?
Given property works best as a long term investment if you don’t have the time, money or skills to renovate, sub divide and do more creative property ventures, the major risk most investors face is that of having to sell at the wrong time. If property doubles every 8-10 years on average, being forced to sell at year 5 because you lose your job etc. can be disastrous. So having income protection insurance as a safety net, and ensuring your property is renting for the best amount as often as possible is important.
How can I spot a property with good investment potential?
To avoid having to sell prematurely, ensuring you invest in an area that has strong rental income or yield as it is called by real estate professionals is crucial. One way to ensure the yield is good is to try to purchase in high demand areas where there is a limited supply of new properties available. So instead of new house and land packages in growth corridors where your property is one of thousands of new properties, we instead recommend you focus on established, popular areas close to major infrastructure where there is not much more development that can happen.
Leafy suburbs with a mix of renters and owners is great also, as it often results in better communities where renters are vying to move in, pushing the rent up. Further, ensuring that the suburb and surrounding areas have a good mix of different employment opportunities is a great way to ensure your tenants stay happy, employed and rent-paying!
Mining towns and rural areas are bad in this respect, because if the major handful of employers or mining companies slow down, much of the work force suddenly can be threatened. As such, capital cities where there are more diverse employment opportunities are almost always a safer investment location.
As you may be starting to see, investing in a property is time proven strategy, but there are also many factors that go into ensuring you pick the right investment. Doing your due diligence of the area, and researching current and future supply and demand is key in ensuring your investment is cost effective, and has strong, long term growth potential for the future.