Owning property has always been a big deal in Australia, but now it’s more of an obsession than just a dream. A 2019 study by HSBC bank found that Australians spend an average of 2.5 hours a week thinking about property. That’s more than double the time they spend at the gym (1.08 hours) or talking to their parents (0.88 hours).
A lot of people are wary of the stock market’s ups and downs and prefer to invest their savings in property. After the Global Financial Crisis (GFC), the idea of a stable property market became more appealing. Australians, along with the RBA, saw that housing and housing finance could help prevent future crises.
However, this trend worries younger buyers and some policymakers. They argue that generous tax breaks for property make housing unaffordable and turn it into a speculative asset. Many baby boomers, who missed out on the superannuation scheme introduced in 1992, say they invest in property to make up for their lack of retirement funds.
Despite these concerns, more Australians are seeing the wealth-building potential of property. Here’s what you should know before you start investing.
The Pros of Investing in Property
When considering Investment Property, it’s important to weigh the pros and cons. Here are some key benefits for investors:
Capital Growth
While property prices can rise and fall, Australian home values have historically shown significant long-term growth. From 1993 to 2018, the median house price in Australia grew by 412%, and unit prices increased by 316%. Rising property prices can also increase the equity in your property, allowing you to borrow against it to expand your portfolio.
Security and Stability
People will always need a place to live, so rental properties are generally in consistent demand. While the housing market can fluctuate, it tends to be less volatile than other markets. Thanks to rental income, real estate often provides fixed returns, making it a secure and stable investment compared to other options.
Positive Cash Flow
Investment properties typically offer a steady stream of passive income due to the ongoing demand for housing. Additionally, the rent received can exceed loan repayments and maintenance costs, resulting in positive cash flow.
Access to Tax Benefits
Owners of residential rental properties can claim tax deductions if the rental income doesn’t cover the cost of owning the property. These deductions can maximize returns on investment. Many expenses related to managing and maintaining a rental property can be claimed against other income, reducing overall tax. This strategy is known as Negative gearing.
Physical Asset
Many investors feel more comfortable owning a tangible asset—something they can touch and see—compared to investments that exist only digitally or on paper.
Easy to Understand
Buying, owning, and managing an investment property doesn’t require specialized knowledge. This is unlike other markets, such as the share or cryptocurrency markets. However, there is plenty of information available if you want to explore other asset classes.
Cons of Property Investment
Before investing in property, it’s important to consider the downsides. Here are some of the challenges potential investors might face:
Lack of Liquidity
Investing in property does not provide quick access to cash. Unlike stocks, selling a property takes time, and receiving the returns takes even longer. If you need cash in an emergency, property may not be the best investment. Additionally, you must sell the entire property to access its value, though Refinancing can be an option to access funds without selling.
High Entry Cost
One major hurdle for many Australians is the high cost of entering the property market. A deposit can be tens or hundreds of thousands of dollars. Additionally, there are significant transaction costs, such as Stamp Duty, legal fees, and loan charges.
Ongoing Costs
Beyond the upfront costs, owning an investment property involves ongoing expenses. Furthermore, these include mortgage repayments, council rates, maintenance and renovation costs, insurance, and possibly body corporate fees. Also, prospective investors need a long-term strategy to cover these costs, not just the loan repayments.
Bad Tenants
Dealing with bad tenants can be very stressful. They can cause financial losses if they fail to pay rent or damage your property. Managing problematic tenants adds another layer of difficulty to property investment.
What Type of Property Makes a Good Investment?
If you’re thinking about investing in property, several factors can determine your success. Careful research, planning, and due diligence are crucial. Here are six key considerations:
1. Location
The location should be your top priority. Where your investment property is situated impacts rental demand, tenant quality, and return rates. High-growth areas, marked by increasing populations, good amenities, vibrant job markets, good schools, low crime, accessible transport, affordable insurance, and appealing lifestyle factors (like shops, cafes, and restaurants), are ideal.
2. Type of Property
The type of property should match the location. A standalone house with a backyard suits family-friendly areas, while apartments are more in demand in inner-city locations or near universities where young people prefer to live.
3. Condition of the Property
Conduct a thorough home inspection to ensure the property is in good condition and ready for tenants. Repair and maintenance costs can eat into your investment returns and impact cash flow.
4. Number of Listings and Vacancies
Areas with fewer listings and vacancies typically have strong property and rental markets. Low vacancy rates can drive rental demand, giving landlords the ability to raise rents and increase their returns.
5. Positive Cash Flow
Your investment property should generate positive cash flow, meaning the income it generates covers all ownership costs. This is also known as positive gearing.
6. Potential for Capital Growth
A good investment should also generate a profit when sold. If a property’s value increases over time, this is known as capital growth. When you sell for more than you paid, you achieve a capital gain. However, be aware that the opposite, a capital loss, can also occur.
The Costs of Investing in Property
Investing in property involves many costs beyond the purchase price or mortgage repayments. Here are some common investment costs:
Stamp Duty
Stamp duty, or land transfer duty, is a tax on transferring property ownership. It varies by state and depends on the property’s value, the date of purchase, your residency status, and whether the property is a new home, an established home, or vacant land. Each state government offers an online stamp duty calculator to help you estimate the cost.
Conveyancing and Search Fees
Conveyancing is the legal work involved in transferring property ownership. It protects buyers from future issues and ensures they are aware of any potential problems before purchasing. Conveyance fees are split into:
- Legal fees typically range from $700 to $2500 but can be higher for complex transactions.
- Disbursements: Fees for various searches and legal documents, like title searches and mortgage registration.
However. each state and territory in Australia may have different pricing and agreements for conveyancing services.
Property Inspections
It’s crucial to have your property inspected by a qualified building inspector to check for defects, construction quality, structural integrity, moisture issues, and termites. Inspection costs vary but generally range from $500 to $800.
Additional Ongoing Costs
Before investing in property, be aware of ongoing costs such as:
- Council and water rates
- Building insurance
- Landlord insurance
- Body corporate fees (for apartments or villas)
- Land tax
- Property management fees
- Maintenance costs
Conclusion
Investing in property in Australia offers significant benefits like property value growth, stability, and tax advantages, making it a popular choice. However, it’s important to consider challenges such as high upfront costs, ongoing expenses, and potential tenant issues. Researching thoroughly can help you make smart investment decisions.
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