Should I buy an investment property?

As a financial adviser, a common question I get asked by people in their 30’s and 40’s is ‘should I buy an investment property?’. This is because they have either been directly approached by a company marketing property investment or they just feel that it’s generally the thing people do at their age to get ahead. Property is also easier to understand than shares and if you’ve got your own home, accessing equity can be an attractive option to help you buy the next one.

Given I don’t know your personal situation, I’m not giving you a yes or a no to this question in this post, but instead point out some tips and traps to be aware of like I commonly do when face to face with clients. Here they are:

Tips:

• Long term wealth creation: Property investing can help you to grow wealth over the long term through capital growth over a very long period of time (say 10 years plus) if bought in the right location.
• Tax deductions: The interest on your investment home loan is tax deductible which can help with the ongoing holding cost depending on your individual tax bracket.
• Income: You have a reasonably reliable source of income which should gradually increase over the long term.
• Tax losses: The ongoing tax loss (if there is one) can be helpful while you’re working if on a high tax bracket.
• Capital Gains: The growth in the property value is not taxable until you sell if you make a gain.
• Security: If you are wanting a property for your business or for your kids to rent while they go to uni or are working as young adults, it can be a win-win for your family with a reliable tenant and property security. Some people like to purchase properties where they believe they will live in the future (such as in retirement), and therefore securing a property in a specific location to rent until that time comes can provide peace of mind.

Traps:

• You have to understand what constitutes a good property investment: An example here is that often people get convinced apartments are a great investment because of the tax deductible building write-offs. However they have very little exposure to the underlying land which is the asset which is going up in value over time. The building is de-valuing over time as it ages. This is why the ATO allows you to gradually write off the value of the building! They also have higher ongoing costs with the body corporate or strata fees, lowering your net return.
• The rental yield is not your rate of return: Don’t get excited about the 5% yield ($480/week on a $500,000 property) You then have to take off your property manager fees, rates, insurance, owners maintenance expenses, interest cost if there is a loan. If you have tenants changing every year you also may not receive rent 52 weeks of the year. With higher interest rates, most property investments are going to require you to put your hand in your own pocket to fund them if you are borrowing 80% or more of the purchase price.
• Lack of diversification: Investing in property is a very large investment, with no diversification, and often involves gearing (borrowing to invest). Borrowing can enhance your returns but also enhance losses if the value of the asset goes backwards.
• Maintenance: Often the best areas to invest are more cental to capital cities but this may mean buying an older property that is going to need regular maintenance. This can erode your return very quickly.
• Tenancy risk: We all know the stories of bad tenants who have stopped paying the rent or damaged the property and this wasn’t covered by the insurer. This is a real risk so location and property type, as well as property management are important decisions to try to minimise this risk. Someone once said “if you buy a house in a rats nest you are going to get rats”.
• Debt: As soon as you borrow money to invest you are taking a higher risk. You must still pay back the bank, and if your tenant stops paying the rent or you get sick and can’t work for an extended period of time, this can lead to financial disaster. You have to be prepared for these situations if considering debt for investment so that you are not forced to sell in a hurry.
• Cycles: Property like any investment goes through good and bad periods. They tend to be quite long with property. For instance, WA’s previous property boom in around 2007-2010 saw prices rise over 30% and then subsequently fall and flatline for about a decade. They have risen again since 2020, but this is a reminder that things don’t always go up. Interest rates, strength of local employment, supply and demand all heavily influence the income and growth for residential property and you have no control over these things. Timing of the purchase and the sale are very important. Ideally you want to buy low and sell high, however without a crystal ball this is easier said than done. In a strong market it is very easy to over-pay for a property when you are competing against several other buyers. On the other hand, in a depressed market you can often buy at a lower price because there are more sellers and less buyers.

Residential property is one of many different investments available and you should thoroughly consider alternatives before making a decision.

Shonel x

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Unless specifically indicated, the information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.

Shonel Vuletich is an authorised representative of Synchron, AFS Licence No. 243313.