Buying an investment property is often high on the wealth wishlist for Australians of all…
With interest rates at record lows and the property market on a seemingly unstoppable upward trajectory, now seems like an ideal time for investors in general.
However, it’s still very important to review your individual circumstances and long-term goals – even if that means delaying your purchase.
Before you take the plunge, consider the following:
1. Your financial goals
Property investors generally fall into one of two categories: landlord investors and renovators (or ‘flippers’).
Investors who hope to make a profit in a short period of time are often referred to as flippers: they purchase run-down properties at the bottom of the market, spend time and money renovating them, and then sell them at the top of the market.
This strategy suits investors who have both the time and funds to make significant improvements very quickly. It’s can also be risky because it relies on the market moving up in the short term.
If your financial goals are to build and preserve equity over the long term, becoming a landlord investor might be a better idea. A landlord investor rents out a property and generally uses the rental income to service the mortgage.
Once the mortgage is paid, the rent becomes an ongoing income stream. And, due to the nature of property markets, the value of the home will be likely to have increased.
2. Property type
Different types of properties suit different kinds of investors.
Traditionally apartments have been a popular choice for first-time investors because they have a higher rental yield, and are usually cheaper to purchase.
Houses, on the other hand, are attractive investments for those with more funding at their disposal as they usually have greater capital growth over time.
It’s worth comparing price trends and forecasts in your chosen market before settling on a property type.
In 2021, the buzz among Australian real estate investors has been about regional and rural markets, where prices have been growing twice as fast as in city markets.
Experts say several factors are at play. Importantly, prices in many regional areas have been stagnant for years and are now playing ‘catch up’.
Currently, rental yields in regional areas are also greater than those in the cities.
But that doesn’t mean you should automatically buy in a regional postcode. In fact, investment experts have traditionally recommended inner-city locations over the country because urban prices grow more reliably over time.
Consider your short-term and long-term goals, and learn about the markets on your shortlist, before making a decision.
4. Your financing strategy
Beyond deciding whether to ‘buy and rent’ or ‘flip’, there are various financial strategies that investors can use to enhance their overall wealth position and minimise their tax obligations.
Perhaps the most important decision is whether to engage in negative gearing or positive gearing.
Negative gearing is when the rental return on a property does not cover all the deductible expenses related to that property (including interest on mortgage repayments). The ‘losses’ you make on the property may be used to reduce your taxable income.
Positive gearing is when the rental return covers all your expenses and delivers a surplus. The surplus can be reinvested elsewhere or spent, but you must pay tax on it.
Both strategies have pros and cons. Speak to a registered tax agent before deciding what’s best for you.
5. Maintenance and management
Many investors are shocked to discover how much time, energy and money it takes to manage a property.
In general, if you don’t mind paying owners’ corporation fees, apartment landlords will spend less time on maintenance than house landlords because strata committees take care of maintenance in the common areas of apartment buildings.
But whatever type of property you choose, becoming a landlord brings with it a degree of uncertainty. For example, tenants can cause unexpected damage, and you may not be able to compel them to pay for the repairs.
Terri Scheer’s policies can help cover you from the common risks caused by tenants that standard home and contents insurance may not cover, such as loss of rental income.
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The information contained in this article is intended to be of a general nature only. Terri Scheer does not accept any legal responsibility for any loss incurred as a result of reliance upon it. This article has been prepared without taking into account your particular objectives, financial situation or needs, so you should consider whether it is appropriate for you before acting on it. The Target Market Determination is also available.