Investment properties are typically purchased with the intention of making money, as opposed to purchasing a home to live in.

Property investment is a popular way of investing money in Australia, but you should consider whether it is a suitable investment for you before you begin.

Property investing is an excellent method of increasing your wealth compared to other forms of investment.

If you are considering investing in real estate, here are some things you should consider.

ADVANTAGES:

CONTROL

Investing in real estate is an excellent investment because of the fact that you are directly in control of how much you earn. In addition to the fact that you can manage your assets by yourself, one of the major benefits of using a fund manager or large corporation is that you can be more in control of your assets.

In other words, you can either improve your property or buy a property with a twist that will ensure that your capital will rise quickly if you choose to do so. 

There are a number of ways that you can add value to your property by renovating it or adding furniture to make it more desirable to tenants if it is not producing good returns.

You are able to directly influence the return on your rental property if you take an interest in your property and understand the needs of your prospective tenants, as well as meeting those needs.

TAX ADVANTAGES

In the case that you decide to purchase an investment property, you will be able to benefit from many tax advantages such as depreciation and the possibility of negative gearing.

SECURITY

Residential real estate is often described as having the security of bricks and mortar while also offering the freedom of ownership.  Therefore, the most important thing to remember is that houses do not go out of business the way companies or shares do.

Obviously, this is a result of the size of the residential market, but it is also a result of the fact that approximately 70% of the people who own property are not investors, but rather owners of their own homes.

Residential real estate is the only investment market that is not dominated by investors, and this provides a built-in safety net in the event of a market crash.

INCOME

By earning income from your property, you will be able to borrow money and utilize leverage in order to pay the interest on your mortgage, which will allow you to get the benefits of leverage.

LEVERAGE

There are several advantages to owning a property, one of them is that you will be able to borrow up to 80% of the property’s value from banks. This will enable you to use other people’s money to purchase larger amounts of the property, which will in turn increase your investment returns.

HISTORICALLY STRONG

Over the last 20 years, residential property has outperformed all other investment types such as shares and bonds over a period of time.

PROPERTY IS FORGIVING

There is still a good chance that you will benefit from the value of your property even if you acquired it at the very worst possible time.

As demonstrated by history, real estate may well be the asset that has provided the most forgiveness over the long run.  The value of an investment property is certain to rise over a number of years if you are prepared to hold it for a number of years.

YOU CAN INSURE FOR MANY OF THE RISKS

Taking out landlords’ insurance is not just a good idea for building owners, but smart investors protect their investment interests as well.

CONS:

There are many pros associated with investing in real estate, however, there are also some cons that may place investors on the fence about investing in real estate:

HIGH ENTRY COSTS

There is no doubt that property prices are continually going up and it becomes more and more difficult to enter the property market as time goes by. It is because of these high entry costs that many investors are kept out of the market and make it difficult to get started if you do not have the discipline to save and some money to invest.

LACK OF DIVERSIFICATION

Due to the high entry cost of investing, it is common for beginning investors to place all their eggs in one basket due to the high entry costs. There is a risk associated with this lack of diversification if the market suddenly changes or if your investment does not perform as you expected it to.

It is clear that the answer to this question is to own the right type of property, that is, the type of property which is not subject to dramatic swings in its value when the market turns negative, which is precisely what is the case when the market turns negative.

ONGOING AND ADDITIONAL COSTS

It is important to keep in mind that investment properties come with ongoing costs, such as insurance, council rates, mortgage repayments, maintenance, renovations, etc.

In fact, these expenses may be recurring, or they may come as a surprise at the most inconvenient time for you. If you own a property that has the potential to increase in value over time, you can expect your rental income to not be able to fully cover your expenses in the early years of the property’s existence.

In spite of the fact that many investors top up their negative cash flow with savings, savvy investors have set up cash flow buffers in a line of credit or offset account in order to cover this negative cash flow.

TENANT PROBLEMS

Regardless of the fact that you hire one of the best property managers to look after your property, at some point you will still encounter tenant problems or periods of vacancy, which, unless you have the protection of landlord insurance or cash flow buffers, can have a significant adverse impact on your finances.

PROPERTY IS NOT A LIQUID ASSET

Buying a house is a long process and it cannot be done by simply selling off one part of it and converting it into cash immediately.

SURPRISES

Things like changing interest rates and unexpected repairs seem to creep up on investors every now and then.

Conclusion

There are many factors to consider when deciding to buy an investment property, including your goals, your risk tolerance, and your investment plan before taking the plunge.

It is important to compare the expected income of a property with your incoming expenses after you have chosen a property. In the event that there is a shortfall in the budget, consider whether or not you can cover the expenses on a long-term basis. You may also want to think about whether you would be able to cover all your expenses in the short run if you had no tenants for a while.

Make sure you do your research on the property market before you decide how to get an investment property. You will be able to get a higher return on investment if you buy in the right place and buy only what you need.