Property investment is one of the most popular ways to invest money in Australia, with 30% of Australians renting their homes. If you're a beginner investor looking to get into real estate investing, you might not know exactly where to begin, and making the wrong move can be costly.
When investing in real estate, it's important to remember that the goal is to utilise your funds now and allow them to increase in the future. It's similar to the Monopoly, where you buy properties, produce rent, and buy more properties with the money you earn, all while avoiding bankruptcy. By doing this, you're slowly building your investment portfolio and paving the way to financial independence. But before anything else, you need to think about why you're investing and if it's the right move for you.
The Pros and Cons of Property Investment
There are some things to consider when taking the first step:
- Properties are tangible investments. They're easy to research and understand and are also less volatile compared to other types of investments. Another benefit is that banks have a lot of experience when it comes to property, so they'll be able to guide you through the standard processes.
- You can take advantage of tax benefits. Costs that involve owning an investment property like maintenance or loan fees can sometimes be tax-deductible. You can also use any losses incurred from negative gearing, where income might be less than expenses, as tax deductions.
- Properties can give you long-term returns. If your property's value increases over time, you're bound to get good returns on your investments. Properties also have the potential to receive rent as a source of income before eventually being sold.
- You get access to equity. Equity refers to the difference between assets (your property) and liabilities (the amount you owe). For instance, if your property is valued at $600,000 and you still owe $200,000 on your loan, your equity amounts to $400,000. You can use equity to secure loans on other investments like renovations or even another property.
- You make the decisions. Compared to investing in the share market, where companies usually have their own management, it's up to you to make all the important decisions for your property. This includes ways to increase your property's value (renovations, cleaning, etc.). You also have control over how quickly you pay your home loan, which can help increase your property's equity.
- Buying and selling properties are expensive. Before you start investing, it's important to consider how much you'll need to fund your investment and when you'll need the money. Properties cost a lot, and on top of that, there are other fees you need to pay before being able to invest. These fees include stamp duty, building and pest inspections, legal fees, and loan set up costs. You should also consider other costs when you decided to sell, such as capital gains tax (CGT) and agent fees.
- If there are tax benefits, there are tax ramifications. While most investors focus on the impact of tax deductions when investing in properties, remember that you are liable for paying CGT. This is the main difference between buying a house and land package as a home and buying one as an investment property. If you're purchasing a home, chances are you won't have to pay for CGT.
- Not all property values increase over time. There's a common belief among Australians that all property values are likely to increase over time. However, this isn't always the case, and it isn't the only thing you should consider when looking to buy for an investment. Consider the following: capital growth, rental property income, and running costs.
- Equity isn't guaranteed. Your equity can change anytime; a property's market value can go up or down, affecting the value of your equity. It's also important to remember that just because you have equity on your property doesn't mean you can immediately borrow against it. This all depends on your lender and their criteria for loans. Also, consider that borrowing against your equity will increase your debt, and if you're not ready to pay it off, it's better not to borrow in the first place.
Now that you know the pros and cons of property investment, it's time to decide whether you still want to take a shot at property investment. If you do, then the next step is to build your portfolio.
What is a Property Investment Portfolio?
An investment portfolio, also known as a real estate portfolio, is a group of property investments owned by an individual, a group, or a company. This usually includes past and current real estate deals and other types of real estate assets. Owning multiple investment properties gives you more financial growth opportunities through multiple income sources (a.k.a, your rentals).
How to Properly Build and Grow Your Portfolio
With interest rates at an all-time low, now is the perfect time to invest in properties.
Do Your Planning
The first step is to figure out your goals and what you'd like your portfolio to achieve. There are different ways to invest in properties like buy-to-let and fix-and-flip. The former refers to buying a property and renting it out for profit, while the latter refers to buying rundown properties, fixing them up, and selling them for a higher price than you bought them for.
The next step is to create a business plan that will help you set short-term goals and properly achieve them. It may be a lot of work at first, but having a solid business plan will be worth it in the long run.
Speak with Your Lender
Ask your lender or bank to help you figure out its value and how much equity could be in it. If you've only purchased your property recently, the equity might not be as big as you'd imagine. Give it some time to grow, and once you have enough equity in your property, you might be able to use it as a deposit for your next purchase.
Choose Your Property
Once you’ve done your planning and spoken to your lender, be on the lookout for what properties are available on the market and where you want to buy. Technology has made searching for properties easier through property apps, which help you find the perfect property for you with a swipe of a finger. You can also use home loan calculators to help you figure out how much you might be able to borrow and what your repayments could be.
It's important to make sure that you have the budget for all the costs that accompany owning an investment property. Also, remember that with any investment, there is always a risk. Do your research and ask as many people as you can for advice before investing to make sure you're not about to make a huge mistake. Invest wisely!