With the spring property season in full swing, many people may be questioning whether buying an investment property is an appropriate option for them. In making this assessment, there are a number of things worth considering and here we discuss a range of factors relevant to residential property investment (read about Commercial Property Investment).
The first thing to note is that buying property as an investment is different to purchasing a residential or holiday home, both of which implicitly have emotional and personal value. For most people, an investment property is an asset purchased to achieve an investment objective, and its acquisition is based on financial benefit.
An investment property is a vehicle for capital growth and income through rental receipts (which can fully or partially offset mortgage repayments). It can also facilitate tax benefits through negative gearing.
Whilst, direct property is often considered to be a more stable investment than other types of assets, in reality property is also subject to price fluctuations. The fluctuations may be less obvious as property is a relatively illiquid asset and each property is not bought and sold every day.
If you invest in direct property, potential issues you could face include loss of income due to lack of tenancy or reduced income from a soft rental market, expensive maintenance and repairs, increases in mortgage repayments due to interest rate rises, and even losses in capital value resulting from declining property prices. You need tothink carefully before buying a property and be prepared to weather these changes.
Be mindful that property investment requires ongoing attention through the life of the investment, which you may attend to yourself or you can outsource to others. This includes acquiring and monitoring finance and insurance, managing tenancy, paying council rates, organising repairs and tax reporting. If you hold the property for a longer duration, you may also need to think about renovations.
Property investment has relatively high entry and exit costs, and is generally better suited to investors with a preference for long-term holding.
Other questions to ask if you are considering buying property are:
- Is property investment in line with my investment strategy?
- Am I comfortable with the risks?
- Have I factored in all the costs of buying, including pre-purchase inspections, stamp duty and conveyancing fees, and the costs of selling?
- How much debt am I comfortable taking and do I have access to finance?
- Am I prepared to enter a long-term investment?
If you feel like this is an option you want to explore, do your homework. You may also want to talk to your financial adviser about other ways of building property into your portfolio, for example, by investing in listed property trusts or via managed funds.