Property Investment Australia
Published 7:01 am 6 Jul 2020
Property investment Australia is all about creating long term wealth through real estate investment. Over a long period of time, property investment in Australia has been the one asset class that has consistently seen steady growth.
Table Of Content
- Why should you consider buying an investment property
- What are the pros and cons of buying an investment property
- Cost base of investment property
- What are the costs of buying an investment property
- What is the ongoing cost of investment property
- What is the cost of selling an investment property
- What are the considerations with investment property
- Distressed property investment
- Property investment strategies
- Alternative property investment
For decades Australian’s have always looked to residential property as one of the leading investment options.
And rightfully so. Over the past 40 years, the value of house prices in Australia has continued to appreciate significantly.
However, before you buy an investment property or consider any type of real estate investment there are a number of things you need to weigh up including both the benefits and the risks as well as the type of real estate investment strategy.
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Why should you consider buying an investment property
Real estate investment is one of the most effective ways to build wealth and set your self up financially for retirement.
However, interestingly, the vast majority of Australian’s don’t actually own an investment property. Only 8.7% or 2,097,392 people own one or more investment property according to the ATO. That means less than 10% of the entire population really understands what it means to do any form of real estate investing.
What are the pros and cons of buying an investment property?
There are a number of significant benefits to real estate investment, but you must also be aware of the risks.
What are the pros of investment property?
Real estate investing has proven to show strong steady returns over a long period of time and while there are ups and downs as an investment class, property continues to be one of the most stable.
One of the big advantages of real estate investing is the ability to achieve cash flow, which is generally the income you receive from renting out our investment property. In certain situations, the income you receive from the rental income is more than enough to cover your interest payments and also any expenses.
This allows the property to effective look after itself and the investor can sit back and wait for the capital growth to come without having to dip into their own pocket each month.
While capital growth and cash flow are important and very welcome, arguably the most overlooked and biggest benefit of real estate investment is leverage.
Leverage is the ability to control a large asset with only a small amount of money. In real estate investing terms, this would be the ability to buy a property with only a small deposit.
Depending on your personal circumstances, you could buy a property with as little as a 5-10% deposit. However, most lenders require a 20% deposit to avoid any lenders mortgage insurance. The belief of the lenders is that property prices are unlikely to fall more than 20%, so they can feel confident lending this amount of money for real estate investment purposes.
What that means is that with a small deposit of only 20%, an investor can control the entire asset and more importantly, gets to benefit from the capital growth and cash flows on the 100% of the value of the property.
In practice, this means the return your receive on your cash is far greater than many other asset classes, because of the impact that leverage has.
Property Investment Tax incentives
Real estate investing is also a great way to achieve significant tax benefits which are not available for many other types of investments.
The most common benefit for most investors is the ability to claim any losses against their income, known as negative gearing. If the total of your mortgage payments and expenses is greater than the income you receive from rent, you are able to claim that loss against your regular income from your day job.
At the same time, there are also a number of other tax benefits such as depreciation, which can be significant on newer buildings as well the costs of ongoing maintenance and repairs.
What are the cons of of investment property?
While there are many benefits to real estate investing, it’s not without its risk. It’s important to understand what the downside might be before getting started.
Real estate is a huge part of the Australian economy and provides a lot of jobs, but with it also comes a number of costs.
Transactions costs in real estate are generally very high, with arguably the biggest costs being stamp duty. Stamp duty is a state government levy on the purchase of real estate. While the rates vary from state to state, allowing 4-5% of the overall cost of the property is a good estimate.
When the time comes to sell, real estate also comes with high sales fees. Sales agents charge around 2% of the value of the property and there are also other costs to consider such as marketing. There are also other costs in the transaction process such as settlement and legal fees, just to name a few.
Unlike the stock market, where you can get in and out of a position within a matter of minutes, property is a longer-term proposition. It takes time to market a property, find a buyer and then wait for that buyer to settle on the property.
All in all, this can be a process that takes many months from the moment you decide it’s time to sell. That’s something that needs to be factored into your decision-making process.
Cost base of investment property
Before getting started with real estate investment, it’s important to understand the types of costs that you’re going to run into. Both in terms of the upfront costs as well as the ongoing costs that are easy to overlook.
What are the costs of buying an investment property?
The costs of purchasing an investment property can be high and you’ll need to have a decent sum of money put aside to cover those upfront costs if you’re looking to get started with a real estate investment.
The main cost to be aware of is stamp duty. As mentioned, stamp duty is a state government levy on the purchase of real estate. As a good ballpark figure, stamp duty costs will be approximately 4-5% of the purchase price, but that varies from state to state.
So on a $500,000 property, you should expect to pay somewhere around $20,000-$25,000 depending on the state the property is located in.
Other costs to consider are settlement and legal fees, which will again vary, but budgeting between $1000-$1500 will be a good rule of thumb.
If you’re taking out finance there might also be other costs involved such as loan establishment fees, which will generally be around $500-$1000.
It is also worth paying for things like a building and pest inspection and these will be upfront costs of around $500.
|Stamp Duty||4-5% of the property value|
|Settlement + Legal Cost||$1000-$1500|
|Loan establishment fees||$500-$1000|
|Building and pest inspection||$500|
What is the ongoing cost of investment property?
Once you’ve purchased your investment property, there will still be a number of ongoing costs to consider.
One of the main costs for property investors will be the cost of property management. These are the fees charged by the management company to look after your property and manage the tenants. The fees charged vary between 5-10% of the total rental income.
On top of those costs, these companies also charge fees to find tenants, do property condition reports, as well as routine inspections. Costs such as photos and marketing will also be coming out of your own pocket. Things like ongoing maintenance and repairs will need to be paid for.
If you own a unit or apartment, there will also be strata costs that need to be paid. These costs will cover some of the maintenance and repairs for the overall building which could reduce your fees elsewhere. There are also insurance fees that need to be paid.
As the property owner, you will be liable for land tax in some states as well as local government fees. The cost of water is another expense, but in some circumstances, this is passed on to the tenant. It’s also worth considering vacancies as a cost of sorts as any time your investment property is not tenanted, there is no income being generated.
What is the cost of selling an investment property?
When the time comes to sell, the main costs involved will be from working with a sales agent. Agents charge around 2% of the value of the property and on top of that, you will need to pay for additional costs such as marketing and photography.
In many instances, you will need to put some money into preparing the property, such as repairs and things like painting. There might also be costs involved for settlement. So even when you’re selling, there are significant costs that you’ll need to factor in.
What are the considerations with an investment property?
The main reason people buy an investment property is to achieve financial gain. For the most part this comes through capital growth.
So before looking at a real estate investment, it’s a good idea to understand what might drive this growth.
As a general rule, capital growth comes from continued levels of demand and or low supply.
Demand is generated because people want to live in that area, so when you are looking at a real estate investment, you need to consider amenity. A property should be close to things like beaches or rivers, good shopping, publish transport and job opportunities as well as good schools.
The type of property is also important. We have to remember that land appreciates in value while buildings depreciate. Buying properties with large land components is always a sound strategy, particularly when that is coupled with it being in an area with good amenity.
Distressed property investment
While achieving good capital growth is always the long term goal, you need to pay the right price for the property in the first place. It doesn’t matter how great a property might be if you pay far more than what it’s worth.
Ideally, you pay well under market value and one of the best ways to do this is look for distressed properties.
Distressed properties are generally where the seller is highly motivated to sell, often for financial or personal reasons. Such as a looming default or bankruptcy or something like a divorce.
These situations are an excellent opportunity to buy an investment property well under market value and at the same time create instant equity.
Property investment strategies
The beauty of real estate investment is that there are so many different ways to create wealth through various property investment strategies.
It’s no secret that most capital growth occurs in popular inner-city metro locations. Areas that are close to beaches and in high demand areas will always achieve steady capital growth over a long period of time.
That’s because people are always prepared to pay to live in those locations. Investing in these types of areas to achieve capital growth is a solid strategy, but just be aware that these areas often have the lowest rental yields given the high demand.
When an investment property earns more rent that the costs of paying the mortgage and expenses, that property is known as being positively geared.
Investing for cash flow puts money in your pocket each month and allows you to wait for capital growth to occur. The only catch is that positive cash flow properties are often found in regional areas, where capital growth won’t be as high as many of the inner-city areas. But your ability to hold the property will be a lot greater.
One of the most unique things about real estate investment is that you can actually improve the value of the asset.
The most common way to do this is by something simple like doing a renovation. But you can also look at more advanced strategies such as small subdivisions.
Adding value with these types of strategies is a way to manufacturer instant equity instead of having to wait for the growth to occur naturally.
Alternative property investment
When you get more experienced as a real estate investor, you can start to look into more advanced or alternate property investment strategies.
In recent years there has been a sharp increase in these types of investments and investors look for more opportunities. Some of the types of alternative investments include multi-unit dwellings such as student accommodation.
There has also been a rise in rent years of investors purchasing holiday homes and renting them out through platforms such as Airbnb. These strategies are generally used to generate higher yields.
Other alternative property investments focus on opportunities in the commercial real estate sector such as child care centres or petrol stations, which generally have higher yields than residential property.
Is property a good investment in Australia?
Every form of investment carries a certain risk, whether it be gold, bonds and securities, cryptocurrencies or the share market. The property market is no different, and there have been plenty of cases of individuals losing money through unsuccessful real estate investments. That said, over the long term, property has proven to be a reliable investment in Australia, helping to create wealth for millions upon millions of people. While there are no guarantees past trends will be repeated, many Australians have made property a central part of their investment strategy.
Can I buy a house in Australia if I am not a resident?
It is possible to buy a house in Australia if you are not a resident, however strict conditions and limitations apply. Non-residents need to apply to the Foreign Investment Review Board for permission to acquire a property. Approval is typically only granted for non-residents to buy new properties, off-the-plan dwellings currently under construction, or greenfield sites where a property will be built. The rules and regulations are aimed at stimulating Australia’s building sector while preserving existing homes for residents.
What is the 80-20 percent rule?
Also known as the ‘Pareto Principle’, the 80-20 per cent rule suggests that in a given endeavour 80 per cent of the consequences come from 20 per cent of the causes. The concept is often used in financial and property investing circles where entrepreneurs try to identify the 20 per cent of investments that tend to earn them 80 per cent of their revenue. They then try to learn lessons from these successes to improve their overall business.
Should I buy a home or investment property first?
There is no right or wrong answer as to whether an individual should buy an investment property or home first. Different people will have different goals, financial positions, and degrees of willingness to take on risk. The most common course of action in Australia is for someone to first buy a home and then buy an investment property. However, there is an argument to be made for the reverse strategy. Buying a low-cost investment property can allow an individual to get a foothold in the real estate market far sooner than if they were saving for a family home. They can then enjoy potential benefits such as capital growth and negative gearing, helping them to gather the capital needed to buy a home.
How many investment properties can I own?
There are no set limits on the number of investment properties an Australian can own. There are many cases of individuals owning two, three, four, even dozens of properties as part of an investment portfolio. The limiting factors on the number of properties you own should be your ability to service your loans (even if the market and official rates change markedly) and your willingness to invest heavily in a particular asset class, as opposed to multiple types of assets. If you place too many eggs in one basket, you place yourself at severe risk should you need to liquidate your assets quickly.
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