With so much conflicting information out there, it’s hard to know what to do when it comes to investing in property. You’ll hear stories of people making millions overnight, and at the same time, hear stories of people losing millions overnight.
There’s a lot of marketing hype in the property industry and you’re off best being well-informed before you start considering investment properties.
Check out the following pros and cons of investing in property.
- It’s more stable.
You know the phrase “safe as houses”, have a guess how it came about? Property values don’t tend to drastically rise and fall the way other investments such as shares can, except in very unusual circumstances. As properties often take around a month to sell at their fastest, they’re not subject to the same price fluctuations which can occur with shares which can be sold in seconds.
- There’s potential tax benefits.
“Negative gearing” has been an in-vogue term in Australia for a while, due to the tax implications it carries. Have a chat to your accountant about whether you would stand to get any tax benefits from owning an investment property.
- “Set and forget”.
Somewhat related to point 1, property investment is more suited to those who prefer a “hands off” style to investing. If reading over stock market reports and losing sleep over market fluctuations doesn’t sound like your idea of fun, then a slowly appreciating asset such as a property may be more suitable for you.
- It can provide a steady income stream.
If the weekly rental income on your investment property is greater than the loan repayments and any other costs associated with the property, then your property is positively geared. That is, it’s making you money each week. A steady rental income stream is helpful to allow you to save and more accurately forecast and plan other investment goals you may have.
- You can use your investment property to buy more properties.
If you have existing equity in your property, you can use that equity to form a deposit on another investment property. As most banks are less willing to lend money for what they perceive as riskier investments, it can be easier to borrow more money to build a property portfolio than other investment types.
- It’s a tangible product.
More of a benefit to put your mind at ease, many people feel better about property investment because it’s a product they can see and touch, rather than other investments like shares which feel like they only exist on paper. Unlike shares where you have no input into the control or direction of the company you have shareholdings in, you’re able to modify or change your property to your taste. You can renovate, knock it down, or even move into it if you decide you like it enough.
Cons of property investment also include:
- It’s expensive to get started.
Many lenders these days want a full 10% plus costs deposit for any investment property. Once your stamp duty, legal fees, lender fees, and other costs are taken into account, you can be looking at a $70,000 deposit for a $500,000 house. Other investment types such as shares don’t require you to put down as large a sum in one instance.
- It can take a while to see a return.
There are several costs to consider with investment properties, such as stamp duty and agent costs when selling. In Australia, you can usually expect to hold a property for about 4 years before you sell at a profit to recoup all those costs. Stories of people doubling their investment in a couple of years should be taken with a grain of salt. It can occur, but it occurs extremely rarely.
- It can hurt your cashflow.
In the same way that properties can help your cashflow, they can cause issues when you’re unable to find tenants for them. Changing markets favouring tenants rather than owners, increasing interest rates, or increased residential development near your investment property can all mean that your vacancy estimations (how long the property sits empty in a year) can blow out and ruin your income forecasts.
- It’s a long game.
Both a good and a bad thing (see point 3), but if for some reason you need access to money fast, then having it locked up in property may be an issue. When people are forced to sell quickly, they often have to do so for less than market value. There’s also the issue that you have an extended sale period and can’t find a buyer in time.
- Tenancy issues.
When you have good tenants, it can be a dream. When you have bad tenants, it can be a nightmare. It can be surprisingly difficult to get rid of bad tenants out of your properties, and the damage that bad tenants can do can often cost more than a standard rental bond. Choose wisely when picking tenants, and make sure they’ve got solid references. Better yet, go through a property management company and get them to do it for you.
- Problems with the house itself.
When you’re buying a house, you should always get a building and pest inspection done. However, you can never be 100% sure that everything gets picked up. Occasionally, structural issues won’t be picked up in the building and pest inspection, and you could be up for thousands in renovation costs.
Unfortunately, the worth of your property can be determined by those around it. If you get neighbours who allow their home to become an eyesore, it is likely to affect the price your property can attract when you go to sell it.