Buying and managing an investment property
Buying a property to rent out is a popular form of long-term investment in Australia. Houses and units are easier to understand than many other types of investments, yet they do have some issues you need to be aware of.
- Buying an investment property
- Costs of property investment
- Pros and cons of property investment
- Overseas property investing
Buying an investment property
Where and what you buy will affect your return on investment. Here are some tips to help you identify a good investment property.
Where to buy
- Familiar markets – Consider buying an investment property in an area you are familiar with as it will take you less time to research. Check recent sale prices in the area to give you an idea of what you can expect to pay for local properties.
- Growth suburbs – Look for areas where high growth is expected, where there is potential for capital gains.
- Rental yield – Look for areas where rents are high compared to the property value.
- Low vacancy rates – Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area, which could make it harder to rent the property out, or sell it in the future.
- Planning – Find out about proposed changes in the suburb that may affect future property prices. Things like new developments or zoning changes can affect the future value of a property.
Remember that property values can fluctuate over time. For example, the value of Gold Coast units fell by 17.9% between February 2008 and March 2013 (Source: rpdata – Rismark 2013).
What to buy
- Attractive features – Look for investment properties that will appeal to as many people as possible, like a second bathroom, lock up garage or nearby shops, schools and transport.
- Wide appeal – Find a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees.
- Low maintenance – Keeping costs down is important, older homes or those with features such as a pool or extensive landscaping may cost more to maintain.
- Property type – Units can be easier to maintain than houses, although you will have to pay body corporate fees.
Investment property advisers
Think carefully before using the services of groups of professionals who work together and recommend each other’s services, such as property developers, accountants, lawyers and mortgage brokers. Be particularly wary if they give you property investment advice to invest in a property market you are not familiar with. Do your own research and choose your own service providers.
Property investment seminars
If you are thinking about investing in property, you might decide to attend a seminar that promises to make you a fortune through property investment.
These events often use high-pressure sales tactics to rush you into making big property investment decisions. Find out how to spot the warning signs of a dodgy investment seminar.
Costs of property investment
Buying, managing and selling an investment property can be costly and will affect your overall return.
Buying an investment property
Some of the costs involved with property investment include: stamp duty, conveyancing fees, legal costs, search fees, and pest and building reports.
Owning and managing an investment property
When you own an investment property, you will be responsible for such ongoing costs as: council and water rates, insurance, body corporate fees, land tax, property management fees (if you use an agent), repairs and maintenance costs.
If you borrowed to invest, you will also have mortgage repayments, and if your investment is positively geared you may pay tax on your rental income.
Check you can afford the repayments on an investment property loan.
Many people use interest-only loans to fund an investment property, although the principal will need to be repaid eventually.
See what an interest-only loan will really cost you.
You can either manage your property yourself or engage a managing agent to do it for you.
If you manage the property yourself, you will avoid paying management costs but you will have to do everything, from showing the property to tenants to collecting rent and organising repairs. You also need to comply with landlord regulations.
If you use a managing agent to look after the property, the management fees you’ll pay are tax deductible.
While you don’t need to pay for home contents insurance, you will need to organise building insurance which cover you for building replacement if, say, the house burns down. If you buy a unit, building insurance will be paid from your strata levies.
You should also consider taking out landlord insurance. This protects you if your tenant damages the property or if they leave without paying the rent. The cost of landlord insurance is tax deductible.
If you are relying on part of your salary to cover your repayments and expenses, make sure you have adequate income protection insurance. Your ability to earn an income may be the most important asset you have.
Repairs and maintenance
You need to include repairs and maintenance in your investment property budget. If your tenant complains that the oven is not working or the shower starts leaking, you need to fix it straight away. Consider the age of the property when you are working out how much to set aside every month to cover emergency repairs and replacing items like air conditioners, hot water systems and dishwashers.
Only renovate your investment property if you think it will increase the rent you can get, or if it will make the house or unit more appealing to renters. Property improvements are not tax deductible.
Selling an investment property
If you decide to sell your property, you will have to pay agent’s fees, as well as advertising costs and legal fees. You may also have to pay capital gains tax if the property has increased in value.
Positive or negative gearing
Most people will borrow to invest in property. This is called ‘gearing’. Negative gearing is where the income from your investment is less than the expenses. Positive gearing is where your income from an investment is higher than your interest and/or other expenses. See negative and positive gearing for more information.
Work out your income and expenses
Once you have a property in mind, think about the income you expect to receive from it, and what your regular expenses will be. If there is a shortfall, think about 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.
Pros and cons of property investment
Property investment is often seen as being less risky than other forms of investment, but it does have some potential pitfalls.
|Less volatility – Property can be less volatile than shares or other investments.||Cost – Rental income may not cover your mortgage payments or other expenses, so you may have to find other money to cover the costs.|
|Income – You earn rental income if the property is tenanted.||Interest rates – An rise in interest rates will mean higher repayments and lower disposable income.|
|Capital growth – If your property increases in value, you will benefit from a capital gain when you sell.||Vacancy – There may be times when you have to cover the costs yourself if you don’t have a tenant.|
|Tax deductions – Most property expenses can be offset against rental income, for tax purposes, including interest on any loan used to buy the property.||Inflexible – You can’t sell off a bedroom if you need to access some cash in a hurry.|
|Physical asset – You are investing in something you can see and touch.||Loss of value – If the value of the property goes down you could end up owing more than the property is worth, this is known as negative equity.|
|No specialised knowledge required – Unlike some complex investments, you don’t need any particular specialised knowledge to invest in property.||High entry and exit costs – Expenses such as stamp duty, legal fees and real estate agent’s fees make buying and selling property very expensive.|
Don’t invest only in property
If you invest exclusively in property, you will have a lot of money riding on one market. If you also own your home, you will have all of your wealth concentrated in the property market.
Overseas property investment
Investing in overseas property is more risky than investing in property in Australia. It is much more difficult to make sure the investment suits your needs if you don’t have local knowledge and you can’t regularly inspect the property.
ASIC has received complaints about promoters who encourage Australians to invest in the United States property market. If you’ve been ‘invited’ to invest in a supposedly ‘cheap’ overseas property, ask yourself why they need someone in Australia to invest? Why aren’t savvy locals investing? Chances are it’s a dud investment.
Here are some things to consider if you’re thinking about investing in property overseas:
- Distance – Good tenants and good property managers are hard to manage when you’re so far away from the property.
- Renovations and repairs – Expensive renovations and repairs may be needed, especially if the property is prone to squatters and vandalism. Buying property sight unseen is also a big risk.
- Hidden costs – You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. There are lots of hidden costs that the promoter may not tell you about.
- Exchange rate – Changes in the exchange rate could affect the amount of income you receive.
Investing in property may be a good way to grow your assets, however, as with other types of investments, it’s important to do your research and seek professional advice if you’re unsure about any aspect of the investment.