What is property investing and why should I do it?
Property investment is something we hear a lot about – in the media, around the water cooler and even at family barbeques.
But what exactly is it? How does it work, and why do people buy investment properties rather than just their own homes?
What is investing?
In a nutshell, people invest to make money. Earning and saving money is great, but if you want to generate greater wealth, you need to grow your money, and that’s where investing comes in.
Investing generally involves borrowing money to buy an appreciating asset (as opposed to depreciating, such as a car) that will give you a financial return over time.
There are many different types of investments, including shares, gold, businesses or real estate.
Australians have a particular affection for property and consequently, not only do many of us aspire to own our own homes, but we also want to possess investment properties. Around 8% to 9% of Australians own at least one investment property.
There’s no surprise why, as, if done correctly, property investment can be very profitable and a great way to generate wealth over the long term.
In the decade to June 2018, nationally property values increased by nearly 44%, which shows there are substantial gains to be made if you buy right.
What are the benefits of property investing?
In property you get a return (or profit) from your investment through the:
Yield (i.e. the rent, if it outweighs the costs, which it will hopefully do over time, if not right away) while you hold the property and;
Capital growth (i.e. the increase in value over time) when you sell it.
Currently, in Australia, the added incentive to invest in property is the tax benefits on offer, including the ability to ‘negatively gear’ a property and receive a 50% discount on capital gains tax if you hold the asset for more than one year.
A property is considered negatively geared if you’re making a loss – that is, the asset costs you more in expenses than the income you are earning from it. The loss from a negatively geared property can be claimed as a deduction against an investor’s taxable income, which means the tax payable is lowered. Depreciation of both the building and items within it can also be a tax deduction, depending on the age and type of property an investor owns.
These tax concessions help investors to minimise the costs of owning an investment property and therefore hold the asset over time while waiting to cash in on capital growth.
Essentially, while investors have to outlay a significant sum to purchase a property and will have ongoing costs, they have someone else paying off the mortgage, with their costs minimised, and the potential to make hundreds of thousands of dollars when the time comes to sell.
It must be done right.
Property investing can be a marvellous tool for wealth creation, but it’s a long-term proposition and success isn’t guaranteed.
Sure, we all know that property prices have risen to extraordinary highs in parts of Australia, with significant growth historically. However, as time goes on it’s becoming ever more critical to invest in the right areas and in the right properties to generate the most robust returns.
Put simply, meticulous selection of both location and property is essential to make money.
There’s plenty of data around that you can use as a research tool when purchasing a property, but you need to know a) how to analyse it properly and b) that it’s doesn’t tell the whole story. Ultimately there’s no substitute for on-the-ground research and knowledge.
For investors buying in an area, they’re not familiar with or that they’re not in close proximity to, it can be beneficial to engage a buyers’ agent. A buyers’ agent can do the due diligence for buyers, ensuring you make a calculated purchase that will yield an impressive return.
For example, in most suburbs, there are parts within it that are more desirable, perhaps because they’re closer to amenity, and certain types of property within that suburb are in higher demand, due to the demographic. If investors don’t know the area intimately, they can fail to buy a desirable property in the most sought after part.
Buying an investment property is entirely different to purchasing a home you intend to live in. It’s all about the numbers, so rather than finding something you like, that suits you – and often forming an emotional connection – you need to look at it objectively and find something that people will want to rent and buy years down the track, so you can make it work financially. Even lending arrangements for investment properties can be different.
Buying right is the most crucial part of property investing. If you make a mistake, rather than making you money, it will cost you money, which will not only hurt you financially but will prevent you from growing your portfolio and achieving your ultimate wealth creation goal.
Not only do you want the property to sell for a significantly higher sum at the end of the day, but in the meantime you need it to be tenanted continuously with a healthy yield to minimise your losses and maximise your returns.
Buying property is something most people do only a few times in their lives, so often it’s best to leave it to the experts.