Most Australians have as a personal goal securing their financial future. Pensions and investing in a superannuation fund may provide a modest income in old age but will it be enough? For the majority of Australians property is considered a sure-fire way to secure their future circumstances. But is there truth to the assumption or has the world changed and is this long-held belief now myth? Here are the pros and cons of property investing and some tips for investors.
Tips for investing in property
There are certain times when investing in property is not a great idea. At a time of rising interest rates, for example, it will be harder to make money on your investment – and harder to hold onto it. From an investment viewpoint one of the most important things to consider is the opportunity for yield and capital growth (yields being income from rent and so forth). Currently yields are low in most Australian cities, and, with the notable exception of Perth, most are not experiencing capital growth either. Another important factor to consider is vacancy rates: if these are falling and good places to rent are getting harder to find, it could be a good time to invest.
Things to consider when looking for a property
Firstly, think about the type of property you want to invest in – house, townhouse, unit or commercial property. Although houses may yield a larger income from rent, they are harder to keep up. Balancing that, the land value will be higher than for a unit. You should also pay a lot of attention to the specifics of location and access to amenities – is the property near public transport, schools, shops, places of work? Is there a great deal of competing rental property in the area? Are the adjacent properties in a presentable condition? Are the majority of people living in the area owners or renters? Finally, think about the area’s future – which way is the area heading? Is there potential for growth in the value of your property or has the area already boomed? What’s the average income in the area? Have you checked to make sure a factory (or brothel!) is not being planned across the street?
Property investment: the pros
- The potential for appreciation. This is what most potential investors in property find attractive: capital growth.
- A regular income from rents. The income from rent can cover a large portion of the mortgage and many years down the track may provide a source of passive income for the owner.
- Potential availability of finance. With the property as security lenders are often much happy to lend for the purchase of a property than for other types of investments.
Property investment: the cons
- Rising interest rates. Whatever politicians claim, and in whatever phase of the election cycle, it is always possible that interest rates will rise – and with them, the size of your mortgage repayments.
- Hidden or disguised costs. Bare these in mind. As well as legal and surveying fees, you will need to consider fitting out costs, management, maintenance, letting costs, insurance and repairs, land tax, water rates, Council rates and – if you buy a unit – strata levies.
- The potential for rent-free periods. You will need to be able to cover the mortgage during periods you are unable to find a tenant.
- Capital loss. Depending on how good your research is, your property may decrease in value as the years go by or not appreciate as much as you need it to to cancel out the holding costs.
- Rents dropping. Rent is subject to market forces, and so, factors beyond your control may mean the amount you are able to charge in rent may decrease. Also, if the property is not well cared for, while others in the area are being renovated, you will not be able to ask as much.
Property investment or shares?
In mid-2007, with rents rising but interest rates also steadily on the rise, property is a less appealing investment. In fact, one of the major newspapers recently commissioned a comparison of renting versus investing and returns over five years. Investors made an opening purchase the equivalent to a ten percent home deposit (eg. $55,500) and invested as heavily as they would have if making mortgage repayments. Their investment grew at 12 percent over the five years and rent cost increased by 3.5 percent annually. The home owner paid a ten percent deposit and interest of 7.78 percent on average over the five years. The property increased at a value of six percent over the five years. Balancing equity, debts and interest/earnings the renter/investor came out $38,000 ahead… but they didn’t own their home.
That said, with the impact of the United States’ sub-prime mortgage crisis still being felt in Australia investing in US shares is currently a less reliable investment. Investments with a heavier weighting towards other countries are less effected.
For wise investors though buying the right property, or shares which pay dividends, is something that can be done all the time.
Interest rate rises tend to mean house prices fall but as you probably already know property is generally a longer term investment. Shares, on the other hand, have headed upwards over the past few years but are becoming more volatile in 2006/2007. Hedging your bets and investing in both to balance your risk is the more prudent approach that many people current favour.
