Why invest in property?

Investing in property in Australia is more than just a big financial decision—it’s an exciting journey toward building long-term wealth and securing your future.

Whether you're looking to diversify your portfolio or take your first step into the real estate market, investing in property before buying your own home can be a smart strategy. It offers the benefits of home ownership while allowing you the flexibility to continue renting in a location that suits your lifestyle.

However, like any investment, property comes with its own set of considerations and several factors to weigh before diving in. This guide will walk you through everything you need to know to make informed decisions and maximise your investment potential in Australia’s property market.

What Is An Investment Property?

An investment property is real estate purchased with the primary goal of generating income, whether through rental returns, future resale, or both. In Australia, investment properties have become one of the most popular ways to build wealth.

Unlike a home purchased for personal use, an investment property is a financial asset that works for you. It could be a residential property like a house or apartment, or a commercial property such as an office space or retail unit. The key advantage is that an investment property can generate ongoing income while also appreciating in value over time.

Why Look At Investment Property?

The appeal of an investment property lies in its ability to grow your wealth while others help pay for it. Once you've saved enough and secured a home loan, the next step is to find tenants who can cover your mortgage payments. This means that even as you continue to pay rent yourself, you're simultaneously building equity in your investment property as your tenants contribute to your mortgage. Over time, this equity can grow, giving you a solid financial foundation for the future.

If you already own a home, you’re in an even stronger position. The equity in your owner-occupied property can give you a significant advantage over first-time investors. By leveraging the existing equity in your family home, you may be able to borrow more than 80% of the value of a new investment property—without having to pay Lenders Mortgage Insurance (LMI). This is because the new loan is secured against your current equity, allowing you to expand your investment portfolio more easily and cost-effectively.

Financial Benefits Of Investing In Property

Investing in property offers a range of financial benefits that can significantly enhance your wealth over time.

Capital growth

Capital growth refers to the increase in your property's value over time. This long-term strategy is ideal for those who can hold onto the asset for several years.

For example, if you purchased a property in 2018 for $300,000 and it appreciated by 5% each year, it would be worth $383,000 by 2023. In this scenario, you would have achieved an $83,000 capital gain, minus any expenses and taxes.

Rental and investment yield

Rental yield is the income you generate from your property after deducting the costs of ownership, such as maintenance, insurance, and mortgage payments. In high-demand areas, rental income can provide a reliable monthly revenue stream for investors.

Investment yield, on the other hand, is calculated by dividing your annual rental income by the total deposit you made on the property. For example, if you earned $10,000 in rental income from a property where you deposited $100,000, your investment yield would be 10%.

Both rental and investment yields are essential metrics that help you assess the profitability of your investment.

Tax benefits

One of the significant advantages of property investment is the array of tax benefits available. Investors can claim deductions for expenses incurred while owning the property, such as interest on loans, maintenance, and property management fees.

Additionally, you can benefit from depreciation deductions on items like appliances and building structures. Another common strategy is negative gearing, where the costs of owning a property exceed the rental income, allowing you to claim the loss against your taxable income.

For example, Lauren owns a one-bedroom investment property in a regional area of Queensland. She earns $1,300 a month in rent, while her loan repayments are $1,500 a month, and she incurs $300 a month in other costs.

Each month, she covers a $500 shortfall from her cash flow. At the end of the year, Lauren’s total loss from the investment is $6,000. She can claim this loss against her $100,000 annual salary, reducing her taxable income to $94,000. This tax benefit helps offset her investment costs while enhancing her long-term financial outlook.

Taking Steps For Your First Investment Property

Investing in property is a big decision and with careful planning and preparation, you can ensure your investment is financially sound and successful.

1. Create a Detailed Budget

Before you begin your property search, it’s beneficial to establish a budget. Start by evaluating your current financial situation, including your income, everyday living expenses, existing debts, and other financial commitments. This will give you a clear picture of how much you can comfortably afford to repay on a property investment.

A well-structured budget should include a realistic estimate of both the income and expenses associated with your future property. This means considering mortgage repayments, maintenance costs, property management fees, and any potential vacancies. Additionally, getting an estimate of your borrowing power based on your expected rental income and your lifestyle can help ensure you are setting achievable financial goals.

2. Save for the Deposit

One of the most important steps in buying your first investment property is saving for the deposit. Ideally, you should aim to have 20% of the purchase price as your deposit. However, don’t forget to factor in other substantial upfront costs such as stamp duty, legal fees, and property inspection costs.

 

If saving 20% seems daunting, there are alternative options that might help you buy a property sooner. For instance, if you already own a property, you might consider leveraging the equity in your current home. Another option is paying Lenders Mortgage Insurance (LMI) if you can’t meet the 20% deposit requirement.

3. Understand and Leverage Equity

Equity in your existing property can also be a valuable resource for financing your next investment. Equity is the difference between your property's current market value and the remaining balance on your mortgage. It accumulates over time as you make repayments and if the market value of your property increases.

If you’ve owned your property for a few years, you might have built up some equity that you can use to fund your investment property. Accessing this equity can provide a significant boost to your buying power, allowing you to invest in a new property without needing to save the full deposit from scratch.

4. Consider the Right Loan Type

When it comes to investment properties, it is important to consider that investor loans differ from owner-occupier loans in terms of rates, terms, and conditions. Consider whether a fixed or variable interest rate loan best suits your needs:

• Fixed Rate Loans: These offer stability by locking in an interest rate for a set period. This can make your repayments predictable and help with budget planning.
• Variable Rate Loans: These fluctuate with market interest rates but often come with added flexibility. You might be able to make extra repayments and access additional features that can help you repay your loan faster.

5. Finding the Right Property

When it comes to choosing the ideal investment property, research is key! Unlike purchasing a home for personal use, investing in this type of property should be driven by rational considerations and expected returns. So, focus on factors such as:

• Location: The area you choose can significantly impact your capital growth and rental yield. Look for areas with potential for future development and consider proximity to schools, transport, and other appealing amenities.
• Type of Property: Decide whether you’re interested in apartments, units, houses, or commercial properties. Your budget will also play a significant role in determining which type of property you can afford.
• Market Trends: Research current market trends to identify properties that offer strong investment potential.

Other Important Considerations

Investing in property offers numerous benefits, but it’s important to be aware of potential challenges and risks that come with it. Here are some key considerations to keep in mind:

1. Cost and Rental Income: While rental income can contribute to covering your mortgage payments, it may not always be sufficient to cover all your expenses. In some cases, rental income might fall short of meeting your mortgage, maintenance, and property management costs. It’s crucial to budget for these potential shortfalls and ensure you have a financial buffer to manage any gaps.

2. Interest Rates: Interest rates play a significant role in determining your mortgage repayments. A rise in interest rates can lead to higher monthly repayments and reduce your disposable income. It's important to factor in the potential for interest rate fluctuations when planning your budget and to explore loan options that offer stability or flexibility based on your financial situation.

3. Vacancy Periods: Vacancy periods are inevitable and can impact your cash flow. During times when your property is unoccupied, you will need to cover the mortgage and other expenses out of pocket.

4. Inflexibility: Property investment can be less flexible compared to other investments. For example, if you need to access cash quickly, you can’t simply sell off a portion of the property like you might with stocks or bonds. Selling a property can be a lengthy process, and you may need to consider other financial strategies to address urgent cash needs.

5. Loss of Value: Property values can fluctuate due to market conditions, economic factors, or changes in the local area. If the value of your property decreases, you might end up owing more on your mortgage than the property is worth. This situation, known as negative equity, can be a risk if property values decline significantly.

6. High Entry and Exit Costs: Investing in property does involve several significant costs, both at the beginning and end of the process. These typically include stamp duty, legal fees, and real estate agent’s fees. These expenses can add up and impact your initial investment budget and overall profitability. It’s essential to account for these costs in your financial planning and consider how they affect your investment strategy.

Key Takeaways

Buying your first investment property is exciting, but it can also feel a bit overwhelming with all the details and decisions involved. From understanding complex contracts and jargon to managing inspections and closing the deal, the journey can be a lot to navigate on your own.

That’s where we come in. At Mason Finance Group, we are here to guide you through the process.  We’ll help you cut through the confusion and provide clear, straightforward guidance every step of the way. Whether you need help with paperwork, understanding your options, or just want someone to chat with about your plans, we’re here to support you.

Ready to dive into the property market? Reach out to us today, and let’s work together to make your investment dreams come true. We’re excited to help you start this exciting chapter in your financial journey!