Investment property: a guide to the Australian market

It’s tangible

Property is a tangible investment and it can be less volatile than other investments.

Banks tend to be well-versed in property and often have a standard lending process to step you through.

The cost of buying and selling a property

On top of the price of the property itself, consider additional costs when investing in property, including stamp duty, legal fees, building and pest inspections, and loan set-up costs.

Get a clear idea of how much you will need for the entire purchase process, and when.

There are also costs when you decide to sell, including capital gains tax and real estate agent fees.

Tax benefits

Many of the costs involved with owning an investment property may be tax deductible.

Property investors can also potentially use the losses arising from negative gearing (where the income from the investment is less than the expenses) as a tax deduction against their other income.

Tax implications

A key difference between an investment property and a home to live in is that paying capital gains tax is generally required for investment properties when they are sold.

For negative gearing, if the investment property makes an income loss, you are solely relying on capital growth to provide you with any investment return. It’s important to make sure you have sufficient cash flow overall to fund this strategy, including the possible increase in the loan repayments if the interest rates rise.

Potential for long-term returns

Property can deliver long-term returns if the value of the property increases over time, plus there’s also potential to receive rental income before the eventual sale.

Positive gearing can be a long-term goal. Where the property income is greater than property expenses, it could provide the investor with a tidy side income.

There are no guarantees

When looking to buy for investment, you should research:

• capital growth – the rate at which the value of the property is expected to grow in value
• rental property income - what the current rental income is like, whether it’s consistent, and if it’s expected to rise
• ongoing running costs – including maintenance costs, rates, insurances, and potentially property management fees.

Access to equity in your property

Equity refers to the current market value of your property, minus the amount you owe on the property.

You could use this equity to secure a loan for another investment. Organise a property valuation to understand your property’s equity value.

Equity isn’t a guarantee

The market value of your property can go up or down, so the equity you have in the property can also rise and fall.

Having equity in a property doesn't mean you can automatically borrow against it as it depends on the lender's loan criteria.

Borrowing against this equity will increase your debt levels and means you're using your property as security. Consider the long-term impact of taking on added debt and what happens if the investment doesn't provide the results you were hoping for.

More decisions within your control

You manage the important decisions for your investment property, including ways to increase its value, such as renovating and paying down your home loan more quickly. This can help increase your equity in the property.

Invest wisely

If you decide to make some physical changes to your property to increase its value, make sure you’re aware of how the changes will impact the value of your property and whether it’s worthwhile.