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Just like cash, shares, stocks and deposit account products, a property might be an option to investors who would like to put their money to work. Whether for a passive supplementary income, a pathway toward financial independence or a retirement plan, real estate might offer you an efficient way towards achieving your financial goals.
Why invest in property?
Rental income may give an investor a consistent revenue stream each payment cycle, while the property itself might also accrue capital gains (that is, an increase in value). The Reserve Bank of Australia presented in September 2015 Bulletin that there has been a general increase in property value over time1 and while there can be peaks and troughs, over the long term value increases have tended to be positive. If you retire, the property you invested in when you were younger could help with funding your retirement.
The real estate industry can also be complex, and might be difficult to navigate even for the experienced investor, let alone for a first timer. Here are some basics on what you may like to consider about property investment.
Financing your investment
To begin your journey towards property investing, you may find that capital can be important to make your first purchase. While some people have the capital from their income or other revenue streams to buy outright, other potential investors may not have this luxury. Instead, many Australians may rely on mortgages to purchase their first investment property, in much the same way as purchasing a first owner-occupied home.
Variable- and fixed-interest loans
Over time, the variable interest rates offered by a lender will fluctuate depending on a variety of economic factors. Sometimes, they will drop, resulting in smaller repayments, but they can also rise, which means that loan repayment amounts can also increase.
This is the essential difference between variable and fixed interest loans, particularly when it comes to investment properties. A variable interest loan is liable to changes which can be partly influenced by decisions made by the Reserve Bank of Australia (RBA). Such changes may be helpful or detrimental to you. This is a risk to consider when investigating this particular type of loan.
On the other hand, fixed interest loans allow you to know exactly how much your repayments are going to be each month for a set number of years, regardless of wider economic changes such as a shift in interest rates by the RBA. This means you are protected when interest rates rise but will not benefit if they fall.
Another option is the split rate loan: this allows you to have some of your loan on a variable interest arrangement, and some on a fixed interest arrangement. This could allow you more certainty in relation to repayments, but also offer some flexibility if the market changes.
Interest-only mortgages
Loans with interest-only repayments are becoming a popular form of loan for investors, with more than half of new investment loan approvals over the last few years being of this type2. These loan arrangements may only require you to pay back the interest over a set period of time, before converting to interest and principal repayments for the remainder of the loan term.
As such, your repayments are smaller for the first few years but will likely increase once the fixed interest period ends. However, consider consulting an expert to discuss options for structuring a loan for your unique set of circumstances.
Unit or house?
In addition to considering how you can finance in an investment property, you may start thinking about what kind of property you are going to look for. Generally, real estate is split into two types: units and houses.
Units
Units are typically thought of as apartments, but they can also exist in other forms as well. They tend to be smaller than houses, and as such may also be less expensive. In fact, the majority of investment housing tends to be focused on units3.
However, just because they may be less expensive than houses, this may not necessarily mean that they are any less effective at accruing capital gains. Depending on the geographical location and current market trends, units may outpace their housing counterparts.
One other factor to note about apartments is that properties of this type are usually subject to strata laws. Strata laws govern the ownership of strata plan apartments as well as common property, such as foyers and swimming pools4. Depending on where you purchased your property, additional obligations and legal considerations can vary across states and local governments.
Houses
Houses, on the other hand, tend to be larger, more expensive and more common in suburban areas, compared to apartments which tend to be concentrated more within metropolitan or urban areas.
As an investor, you will generally need more capital for a house compared to an apartment, but the rental income may be comparatively higher. A house may also attract different kinds of tenants, such as young families rather than students. A house in a suburban location could also net you some land which may be attractive to some tenants, while units will tend to lack this additional feature.
Both houses and units have advantages and disadvantages to an investor, and the effectiveness of each type of property may depend on its location.
Regional or capital city?
Which brings us to the question of whether or not to invest in a capital city of regional area. When thinking of property investment, many people may only consider the capital cities to be worth the expense. However, regional areas could also offer a good opportunity for Australians willing to cast their net a little wider.
The push for affordability
The prices of homes in these outer areas may subsequently increase in value as a result of a potential increase in demand, causing people to look even further out. This is sometimes known as the ripple effect and it can be a major factor driving regional growth value. You may find that properties in regional centres may be less expensive, which could make them an easier option for first time investors. In considering where to make your investment purchases, you may need to reflect on current market trends or driving future forces. In some capital cities across Australia, people may be priced out of the market and need to move further away from city centres in order to afford a home or investment property at a reasonable cost5.
Build or buy?
Next, an investor may need to consider whether they would prefer to build a new property or buy an established one.
Building a property may seem like a difficult project, but there are some options that people may find simpler to work with rather than going it alone. Buying off-the-plan can allow you to have a home built as part of a larger development and can sometimes be a more affordable option. However, it may take some time for the build to be completed.
Established properties can be a better option for some, but these properties may also come with their own issues. Further, established homes could have issues due to their age. New homes built using modern architectural techniques might be less likely to suffer from these types of issues.
Insuring yourself
One step in your investment journey is sorting out insurance. Consider insurance packages that can help protect you from financial loss due to property damage from such things as fire, theft, tenant damage and more. While in an ideal world, your investment would be free from risk, in reality this is not always the case.
This step is no less integral than finding the right type, location and style of property, so consider your options to help minimise the financial risk which could result from damage to your investment property.
Ultimately, what works for one property investor may not work for another, so consider speaking to a property or financial professional to help with making a decision about your property investment options.
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