Investing in Property

Buying a house as an investment property is a powerful way to build wealth, and if entered into wisely can provide excellent capital growth and taxation benefits. Read on to find out more.

What can I do here? Find out more about: Property investment Things to consider Financing your investment

Why invest in property?

Many Australians choose to invest in property because of its proven ability to provide steady returns and capital growth. Further advantages include ongoing income through property rental, and potential taxation benefits.

Importantly, an investment property should be viewed just like any other investment. There are essentially two reasons to purchase an investment property; to build wealth over time, or to obtain an ongoing income. Property caters for both of these needs.

Investment properties: things to consider

What to look for in an investment property

It is important to take an objective view when purchasing an investment property. You will need to take into account the sort of factors which you would not normally contemplate when buying a house to live in. Some of these include:

• Purpose. Is your predominant goal to generate an income or capital growth? These do not always go hand in hand. For most investors capital growth is the goal. In this case, location, taxation benefits and long term development outlook of the property, are important. If you are primarily seeking an investment for income generation purposes, you will need to research the demand for rental accommodation in certain areas before purchasing. It is advisable that whenever you enter into an investment property, or any investment for that matter, to consult with a Financial Planner.

• Property type. Residential property is by far the most common type of property investment. Other property investment options include commercial or industrial sites, however different skills are required to identify the best opportunities.

• Appearance. A common error made by property investors is to buy a house that they would perhaps like to live in some day, despite the fact that this often doesn't eventuate. Just because you don't like the look of a property doesn't mean it may not be the ideal investment for you.

• Ongoing costs. If you purchase a house, particularly an older property, it is likely to cost more in the long run for maintenance and repairs than a more modern option like a unit. However, a unit, villa or townhouse will require payment of strata levies. Also consider the location of the property, which will impact on the cost of annual council and water rates.

• Age of the property. Depreciation is an important financial issue when looking into an investment property and should be discussed with your accountant.

• Term of investment. When investing in a residential property it is usually for the long haul. Minimum investment terms of ten years are not uncommon.

Managing your investment property

One of the questions you need to consider is whether to manage your own investment property, or employ a specialised Property Manager to do the work for you.

While employing a Property Manager will free you of the hassle of looking after your property and tenant, they come at a cost. A Property Management Service will involve a set management fee (usually in the vicinity of 9% of rent collected), a leasing fee if you need to find a tenant, inspection fees and other fees to cover associated services. The following table summarises each option.

Managing your investment property

	Managed by an agent	Self managed
Advantages	Peace of mind - everything is managed by the Agent, and you simply collect the rent Your agent deals with any problems and legal issues Your agent can find new tenants when required Potentially cheaper repairs and maintenance through your agent's contractors No need to visit property or tenant	Save money - no management fees More control, if you prefer personal contact with your tenant and first hand assurance that they are looking after the property
Disadvantages	Ongoing management fee, plus fees to cover letting, inspections and more	How do you collect rent and issue a receipt? Potential disputes and legal issues Repairs and maintenance are your responsibility

Financing your investment

If you are considering purchasing an investment property you need to understand all of the finance alternatives.

Borrowing to invest

A well known investment strategy is to borrow funds or use the equity in your existing home to purchase an investment property. Whilst achieving long term capital growth, this also provides ongoing rent and taxation benefits.

Gearing

When you borrow funds for investment purposes you are utilising gearing. An example of the type of taxation benefit available is negative gearing, which is achievable if the interest payments on your loan are greater than the income you receive from your investment. It is then possible to use the difference as a tax deduction to reduce your assessable income and overall taxation liability.

Using the equity in an existing property

Investors often use the equity in an existing property to fund an investment strategy. Using the equity in an existing property allows you to increase your overall investment potential.

Working out how much equity you have in your home is simple:

Value of existing property

- Outstanding loan balance

= Equity in your home