Interested in property investment, huh? Maybe you're a homeowner thinking of snagging a second property for investment, or maybe you're new to this whole property game and itching to dive in. Well, no worries, we're here to break it all down for you, starting from scratch. In this article, we’ll help you with buying an investment property. So, let’s get started!
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The Advantages of Property Investment
Naturally, several aspects must be considered before leaping into property investment. But let's focus on the bright side for a moment; here are some of the benefits that make property investment an appealing option for many:
Easy Entry Point
Property investment is often viewed as less risky than other investments, mainly because it doesn't demand specialised expertise, like delving into niche markets such as NFT trading or cryptocurrencies. Also, the property offers its perks, including capital gains, rental income, and tax deductions, which we'll delve into shortly.
Property's Value Increase
Capital growth in property means your property's value goes up over time. It's calculated by comparing the current market value with what you initially paid. For example, if you bought a property for $500,000 a decade ago, and now it's worth $900,000, you've gained $400,000 in capital.
Property investors in Australia have historically seen impressive capital gains. According to the latest CoreLogic Pain & Gain report, which analysed around 76,000 property resales, 92.3% of homes made a profit when resold.
While this percentage has dipped slightly in recent quarters, CoreLogic Pain & Gain noted that "property gains in Australia are still substantial overall, and the number of sales resulting in losses has remained relatively low nationwide."
In the last quarter, the median gain for sellers nationwide was $276,500.
While capital growth takes its time, rental yield delivers more immediate benefits.
Rental yield boils down to the income you get from tenants minus the total costs of your investment. If you plan to rent out your property, it's essential to consider its rental yield potential. Moreover, properties with strong rental yields often come with lower upfront costs compared to areas promising long-term capital gains.
Investment in a Tangible Asset
One compelling reason some people opt for property investment is that it's a tangible, physical asset. Unlike shares, you can lay your eyes on your investment. You can drive by it whenever you please, and if something needs fixing, you have the power to take care of it.
Renting out your property opens the door to investment property tax deductions. Here's how it works: thanks to a negative gearing tax break, your property is considered negatively geared if your deductible expenses exceed your rental income. This can lead to tax benefits of investment property.
Also, property investors enjoy the capital gains tax (CGT) discount. Introduced in 1999, individual taxpayers can reduce their CGT by 50% if they've owned the asset, including property, for at least 12 months.
Remember, though, that if the property was your home and you only started using it for rental or business purposes less than 12 months before selling it, you can't claim the CGT discount.
What Property Makes a Good Investment?
Buying an investment property has many advantages, but it's a choice that deserves careful consideration. You need to ponder where you want to invest and what type of property suits your investment goals best.
House vs. Apartments
The choice between a house and an apartment for investment depends on what you want. You should calculate things first, like how much you'll earn from rent and the costs of owning the property. For example, a $2 million penthouse might rent for $1,500 per week, while a $2 million house in the same area might only get $850 per week.
If you plan to renovate or rebuild the property later, rental income might not matter as much. Profits from the property's value increasing (capital gains) become more important.
But you'll want the best rental yield if you want rental income immediately.
So, it's all about what you want: making money when the property's value goes up or getting rental income now.
Owner-Occupied or Rental Properties
Investors have different strategies when it comes to property. Some investors buy a property to live in, hoping its value will increase (capital gains). Others aim to make money from renting it out (rental yield).
CoreLogic research shows a big difference between owner-occupied and investor resales when it comes to making a profit. For example, in the June quarter of 2022, investors were about 35.8% more likely to sell their property at a loss. Even when they did make a profit, it was usually lower ($223,000) than the profits from owner-occupied resales ($348,000).
This difference is essential for potential investors to consider. It helps you decide what property type and where to buy it based on your investment goals.
Choose the Right Suburb for Your Investment
Determining the best Australian suburbs for property investment is a guessing game because it largely depends on your unique situation and goals. Different states, capital cities, and regional areas have growing suburbs, so thorough research is crucial. Even then, predictions can only go so far. Who could have predicted that regional cities would flourish due to a global pandemic?
Traditionally, experts have suggested staying within the first 10km of the CBD for good rental yield and long-term capital gains, depending on your investment objectives. This advice might have shifted somewhat with the rise of remote work during the pandemic. Still, suburbs near the CBD tend to be established and desirable places to live.
Consider proximity to schools (a plus for families), train lines, highways (noise can affect property value), and other factors like access to supermarkets, transportation, or proximity to the beach to make your property more attractive when you sell.
Moreover, many property advisors advise against speculative investing in mining towns or chasing trends ("hot spotting"). While you might strike gold with a suburb on the brink of gentrification, there are no guarantees, so be cautious of high-pressure sales pitches and hot spot speculations.
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