An Introduction To Property Investment in Australia
There are several reasons why property investment in Australia has traditionally been seen as a lucrative venture. Australia’s population is continually growing and housing undersupply is a well-reported reality; two key factors that are contributing to long-term price increases in property.
It is also a relatively ‘easy’ investment, when compared to say, the stock market, as one doesn’t need to be constantly reviewing the financial press for any news which could impact the price of your investment.
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Property investment doesn’t require any prior education or specialist experience and is easy enough to research and understand; just gather your key team members, such as property strategist, loan broker and accountant and start defining your goals.
Property is also tangible, unlike stocks and other financial assets. Is it real and you can touch it. You can inspect it and make sure that it’s being well maintained, watch the neighbouring area for improving infrastructure or rising prices, all while plotting your next move. Let’s take a closer look at property investment in Australia.
Why Invest in Property?
A Sound Investment
Studies have shown that property is a more stable investment than other financial assets like shares. Typically prices in major population centres avoid the boom/bust cycle that can affect shares. Share prices can fluctuate dramatically overnight, while property is far less volatile — prices typically rise and fall gradually.
Consequently, banks will generally loan much more to someone looking to invest property than someone looking to buy shares, the power of this leverage being a powerful wealth builder (but leverage works both ways, so you need to protect yourself in your planning, talk to us about how to avoid issues that many investors don’t address when they are selecting a property).
According to AMP, property in Australian has increased in value at an average rate of 11.4% per annum since 1926. It is a safer investment all-round.
Getting Financing is Relatively Easy
In a nutshell, lenders like property. For the reasons above, amongst many others, getting financing for property investment is relatively easier than borrowing for other investment classes. Lenders are more likely to lend for residential property than any other financial asset at a higher proportion of the value and at lower interest rates than any other asset.
Property Is Long Term
Property should be considered a long-term investment. Buying property involves a considerable upfront cost, as well as substantial ongoing and exit costs, and therefore the value of a property needs time to grow in order for it to be a worthwhile investment. So doing your research at the start is crucial, a mistake on your first property can slow down your plans significantly; as with building anything, getting the foundations set correctly gives you the base you need to grow.
Although property is a relatively stable investment, there are still fluctuations in value (as with any investment). Preparing yourself for the downturns will allow you to reap the long terms benefits, for you and your family.
Property Is Negotiable
Buying shares in completely non-negotiable. You buy shares at market price and that is the bottom line. The property market, however, is entirely based on negotiation. This means that there is huge scope for finding undervalued properties, buying low and selling high.
These are just a few of the key factors that make property investment in Australia a lucrative venture, though there are many more to explore which we will touch on in the future.
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Advantages of New Property vs Old Property
Investing in new property has a multitude of unique advantages over investing in old property, and it’s all about building a robust portfolio for long term growth.
Advantages of investing in new property include:
• New properties attract higher quality tenants at a faster rate than older property, reducing the potential for outlay during vacant periods (which can be lengthy and costly when trying to find tenants for older properties)
• New properties are more energy efficient than old properties, reducing utility costs and environmental impacts
• New properties provide a better investment income
• New properties have a higher claimable depreciation value resulting in better cash flow and may realise a higher resale value than older properties. It’s the depreciation based cash flow which may supercharge your outcome vs older properties (subject to individual circumstances)
• Upkeep and maintenance costs are significantly lower in newer properties
• New developments are often built to integrate with allied infrastructure, such as new transit, amenities and schools, making them highly desirable to owners and tenants alike.
What Makes A Good Investment Property?
There are three key categories that dictate what makes a good investment property in Australia:
The Location — Location is a crucial element in a property’s value. This includes proximity to schools, public transport, parks, libraries, hospitals, shops, cafes and beaches etc. Acquiring property based on location requires a degree of insight and foresight. For example, scoping out growing populations and development of infrastructure, not basing your choices on volatile industries and being aware of proximity to cultural or financial hubs.
The Property — The property itself is, of course, another major factor. A good investment is choosing a property that will always be in demand. This may be influenced by something like the age demographic of an area, as property becomes relatively more expensive floorspace can be one of the first things a builder may compromise on, so looking for strong floor plans, or buildings which offer strong tenant facilities such as private dining rooms, private pool cabana’s or well equipped gyms and pools can help to set your property apart.
The Market — Researching the market is a crucial part of choosing the right investment property. This includes exploring data on current and historical sales and discovering trends and patterns in the market. Get a current copy of Your Investment Property magazine (or similar) is a great starting point, personally I disregard the first half as they highlight the investment flavour of the minute, and head to the back of the magazine where their state by state analysis of the market is a great place to start.
Finding a Good Property Manager
Proficient property management is a crucial element to the success of an investment. Poor management of a property can seriously undermine an investment. On the other hand, a good property manager can help an investment flourish. There are a few key points to remember when trying to find the right property manager:
• Don’t settle for what is right in front of you. Managers can vary widely, with many real estate agents seeing management as being subsidiary to sales, not an attitude you want as an owner.
• Do your research and speak with multiple property managers. Ask critical questions, such as how much experience does the junior manager have, how often is the property inspected, are photo’s taken and emailed to me.
• Look for a manager with experience, credentials, good testimonials and great references.
• Speak with others who have worked with prospective property managers and ask their advice.
When the cost of owning an investment exceeds the income received, the Australian Taxation Office allows investors to offset the loss against their income. This phenomenon is called negative gearing and is one of the key tax advantages associated with property investment.
You may be able to deduct expenses such as loan interest, and setup costs, in addition to insurance, repairs and property management fees.
Depreciation may also provides tax advantages on newer properties, renovated properties or improvements like new kitchens, bathrooms and upgraded amenities. Generally these benefits are “front loaded” so although these items may be written off over quite a long period, much of the depreciation is accessible quite quickly, helping to improve your cash flow from day one on settlement.
Speak to your accountant for a detailed rundown of tax treatment in your personal circumstances is always strongly advised.
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Understanding the Property Cycle When Buying
Is it common knowledge that the property market moves in a cycle. Prices rise, fall then stabilise like clockwork and have been doing so for many decades now.
This phenomenon is known as the property cycle and usually occurs over a 7–10 year period. It can be split into four clear stages:
(1) Prices are stable, leading many people to believe it’s a good time to invest.
(2) Prices rise slowly then rapidly pick up pace.
(3) Prices reach the highest point in the cycle after rapid ascension.
(4) Prices correct themselves, which is often mistaken for a price crash, when it actually just marks the re-stabilisation of the cycle and eventually its resumption.
There are many factors at work when it comes to the property cycle such local discrepancies (it is rare that the whole of Australia is simultaneously at the same point in the cycle) that can be whittled down to fluctuations between cities and even suburbs.
Cost of Investing in Property
The cost of investing is a broad topic that we will cover in more depth in another article. However, in summary, there are two main periods to consider. Initial costs and ongoing cost.
Initial costs include the deposit, loan establishment fees, mortgage insurance, stamp duty and legal fees; all of which are once-off payments.
Ongoing fees include yearly mortgage fees and repayments, land tax, council fees, body corporate fees, property management fees and necessary repairs, most of which are annual or variable costs.
You have done your research, assembled your team and bought a great property. You’ve watched it grow in value through the years and over time it has been joined by others as opportunities arose. But what now?
Remember your team that you brought together? Well now it’s time to get them all working in unison for you again, you need to talk to your property strategist about which properties have got good short term growth left in them and which properties are presently in a consolidation phase of the cycle.
Organise a round table with your accountant, who will look at the different possible financial outcomes, depending on your personal financial circumstances, your property strategist and yourself, and remember they work for you and you make the ultimate decisions! Then decide whether you want to maximise income, create a generational legacy, realise capital gains or even downsize into a more appropriate home, these are the fun decisions as all your sacrifices and planning pay off, enjoy it!
After deciding on a plan advise, your property manager so he can help implement it, whether it’s preparing the property for sale, or simply liaising with tenants to organise open for inspections.
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