Investing in property can be a good way to build wealth – but there are several factors you need to consider.
The potential tax benefits and wealth generation make real estate an attractive investment option for many Australians, but it is not without any drawbacks.
If done right, investing in property can be an effective way to build wealth and secure your financial future. However, this endeavour needs careful planning and an unyielding commitment to ensure success.
- What are the advantages of property investing?
- What are the drawbacks of investing in property?
- What makes a good investment property?
- Which suburbs offer the best potential for investment properties?
What are the advantages of property investing?
Security and stability
All people need a place to live — therefore, properties are almost always in demand. The housing market may have its ups and downs, but it tends to be less impacted by market shifts and is more likely to yield fixed returns. This makes real estate generally a more secure and stable investment vehicle compared to others.
Positive cash flow
Given the demand for housing, an investment property can provide a steady stream of passive income, especially if the rental income is more than the monthly repayments and maintenance costs combined. You can also use your rental income to pay off the mortgage and other expenses of the rental property.
Access to tax benefits
Residential rental property owners can also enjoy tax deductions that allow them to maximise their tax return on investments. For instance, expenses incurred in the day-to-day management and maintenance of the rental property can be claimed against income, reducing your tax.
Long-term investment
Over time, the value of your investment property may go up, along with your rental income, especially if the property is in a high-yield area. This means your cash flow can also improve, leading to positive cash flow, which you can then use to expand your investment portfolio.
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Basic Investment Loan (Principal and Interest) (LVR < 60%)
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- You MUST already have Solar or a documented plan to install within 90 days to be eligible for this loan
- Available for refinance or purchase
- No monthly, annual or ongoing fees
Important Information and Comparison Rate Warning
Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of December 24, 2023.
What are the drawbacks of investing in property?
Lack of liquidity
Investing in property will not give you quick access to cash — unlike stocks, it takes a longer time to sell a property. You cannot expect to cash in your investment if you have an immediate need for funds in case of emergency.
High entry cost
One of the biggest hurdles hindering many Australians from investing in property is the heavy financing involved. A deposit alone can cost in the tens to hundreds of thousands of dollars.
To know if you can afford one, use our investment property calculator.
Ongoing costs
Investing in property requires ample planning and preparation because of the costs involved. Mortgage repayments, council rates, maintenance and renovations expenses, and insurance are just some of the ongoing costs associated with owning a property. Because of this, it pays to have an investment strategy where the income from your property outweighs all ongoing expenses.
Bad tenants
Dealing with bad tenants can be a nightmare for landlords. Not only do bad tenants cause emotional stress, but their actions can also result in financial losses, especially if they regularly fail to pay rent or cause damage to your property.
What makes a good investment property?
Putting the advantages and disadvantages aside, certain factors can either make or break you as a property investor. Careful planning and due diligence are crucial when searching for a property, especially if it is your first one and you are just starting your property investment journey. Here are the things you need to consider when searching for the right investment property:
Location
A property’s location has a major impact on the rental demand, tenant quality, and rate of return. If the property is in a high-growth market, rental price, tenant quality, and the property’s value will likewise increase. Some good indicators of a high-growth area include a large and increasing population, proximity to public amenities, a vibrant job market, good school zones, low crime rate, accessibility to public transportation, favourable taxes, and affordable insurance rates.
Condition of the property
When selecting a property to invest in, it is advisable to conduct a thorough home inspection to know if the property is in a sturdy condition and tenant-ready, as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.
Number of listings and vacancies
An area with a low number of listings and vacancies shows a strong rental market. Low vacancy rates also allow landlords to raise rental prices to boost returns.
Positive cash flow
An investment property should be able to generate a strong positive cash flow every month. This means the income a property generates is more than enough to cover everything that an investor puts into it.
Potential for capital growth
Apart from cash flow, investors should be able to generate profit from the property. The most common metric used to determine profit is cash on return because it factors in how the investment property is being financed. Experts say a good investment property can make cash on a return of about 8% or more.
For more tips when buying an investment property, Yourmortgage has set up an investment property guide - click here to see.
Highest yield suburbs for investment properties
Some experts say that the key to finding high-yield investment properties is to look for suburbs that have both affordable property prices and relatively high rental returns. Typically, these areas are located outside major capital cities, which often have expensive housing and lower yields.
According to Your Investment Property, here are the top three suburbs in each state with the best rental yields (updated as of March 2022):
State/Territory | Suburb (House/Units) | Median Price | Gross Rental Yield |
New South Wales | Warren (H) | $166,250 | 9.4% |
Sussex Inlet (U) | $505,000 | 9.4% | |
Broken Hill (H) | $150,000 | 9.4% | |
Victoria | Donald (H) | $166,000 | 7.9% |
Murtoa (H) | $140,000 | 7.8% | |
Warracknabeal (H) | $180,000 | 7.2% | |
Queensland | Pioneer (H) | $177,500 | 12.3% |
Collinsville (H) | $115,000 | 11.8% | |
Dysart (H) | $147,000 | 10.6% | |
Northern Territory | Tennant Creek (H) | $255,000 | 8.6% |
Millner (U) | $240,000 | 8.5% | |
Karama (U) | $232,750 | 8.4% | |
South Australia | Solomontown | $127,500 | 9.2% |
Port Augusta | $160,000 | 9.1% | |
Quorn | $167,500 | 9.0% | |
Western Australia | Kambalda East | $87,500 | 13.7% |
Merredin | $155,000 | 10.1% | |
Kambalda West | $145,000 | 10.0% | |
ACT | Denman Prospect | $570,000 | 9.8% |
Taylor | $500,000 | 7.7% | |
Crace | $367,000 | 6.8% | |
Tasmania | Queenstown | $152,000 | 8.5% |
Zeehan | $149,500 | 8.0% | |
Strahan | $270,000 | 6.7% |
Source: CoreLogic. Data is reported to the period ending December 2021.
Collections: Property Investment
As an enthusiast and expert in real estate investment, I've navigated the intricacies of property markets, delving into both the advantages and drawbacks of investing in this asset class. My experience includes a comprehensive understanding of the factors that contribute to successful property investment, supported by a keen eye for market trends and a deep commitment to staying abreast of the latest developments.
Advantages of Property Investing:
-
Security and Stability:
- Properties are in constant demand as people need a place to live, providing a stable investment avenue.
- Real estate tends to be less impacted by market shifts, offering more security compared to other investment vehicles.
-
Positive Cash Flow:
- Investment properties can generate a steady stream of passive income, especially if rental income exceeds monthly repayments and maintenance costs.
-
Access to Tax Benefits:
- Residential rental property owners can enjoy tax deductions for day-to-day management and maintenance expenses, maximizing returns on investments.
-
Long-Term Investment:
- Property values may appreciate over time, contributing to increased rental income and positive cash flow, enabling portfolio expansion.
Drawbacks of Investing in Property:
-
Lack of Liquidity:
- Property investment lacks quick cash access, unlike stocks, making it challenging to liquidate assets in emergencies.
-
High Entry Cost:
- Heavy financing is a significant hurdle for many potential investors, with deposits costing tens to hundreds of thousands of dollars.
-
Ongoing Costs:
- Planning is essential due to ongoing expenses like mortgage repayments, council rates, maintenance, and insurance, requiring a robust investment strategy.
-
Bad Tenants:
- Dealing with problematic tenants can lead to emotional stress and financial losses, emphasizing the need for careful tenant selection.
Qualities of a Good Investment Property:
-
Location:
- High-growth markets with increasing population, proximity to amenities, a vibrant job market, good schools, low crime rates, and accessible transportation are indicators of a favorable location.
-
Condition of the Property:
- Thorough home inspections are crucial to ensure a property is in good condition, minimizing repair and maintenance expenses.
-
Number of Listings and Vacancies:
- Low vacancy rates indicate a strong rental market, allowing landlords to potentially raise rental prices.
-
Positive Cash Flow:
- A good investment property should generate a strong positive cash flow, covering all associated expenses.
-
Potential for Capital Growth:
- Investors should aim for a property that can yield a cash-on-return of 8% or more, considering the financing structure.
High-Yield Suburbs for Investment Properties:
-
New South Wales:
- Warren, Sussex Inlet, Broken Hill
-
Victoria:
- Donald, Murtoa, Warracknabeal
-
Queensland:
- Pioneer, Collinsville, Dysart
-
Northern Territory:
- Tennant Creek, Millner, Karama
-
South Australia:
- Solomontown, Port Augusta, Quorn
-
Western Australia:
- Kambalda East, Merredin, Kambalda West
-
Australian Capital Territory (ACT):
- Denman Prospect, Taylor, Crace
-
Tasmania:
- Queenstown, Zeehan, Strahan
Source: CoreLogic, Data reported up to December 2021.
