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Investor

A Guide to Property Investment - The Pros and Cons

25-Nov-2019
Written by Sarah Newton
An investment property is usually bought with the expectation and goal of making extra money through the income of rent. However, you need to weigh up the pros and cons of an investment property before taking the financial leap and purchasing a property for investment.

PROPERTY INVESTMENT PROS
Tax benefits
The majority costs that are involved with owning an investment property can be tax-deductible. This includes costs such as advertising for tenants, fees paid on your loan, maintenance and much more.

Also, if the income from your investment is less than the expenses of the property you also have the potential to use the losses that arise from negative gearing as a tax deduction.

*Negative gearing is a type of financial leverage where you borrow money to purchase an income-producing investment and the gross income produced by the investment is less than the cost of owning and managing the investment. This includes depreciation and the interest charged on a loan

Potential for long term returns
Investing your money in a property has the potential to deliver long term returns. This is achieved if the value of the property increases over time. Rent is another source of income that over time can lead to profits for you, the investor.

Access to equity in your property
Equity is the value of your property in the current market, minus the amount you owe on the property. Equity can be used to secure a loan for another investment. This is beneficial so you can expand your investments and grow your portfolio. In order to understand the amount of equity your investment property holds, you can organise a property valuation.

More decisions within your control
Compared to investing in the share market where you don't know what will happen and how much you can earn, property investment is much easier to control. To increase the amount you are earning with a property investment, you have the control to make decisions to add value such as renovations. You have control over how fast you pay your home loan. You also have the opportunity to increase your equity of the property depending on how efficiently you pay down the home loan.

PROPERTY INVESTMENT CONS
The cost of buying and selling a property
The purchase of a property can be very expensive, not only are you paying for the property itself but there are also significant entry costs that need to be paid. This includes fees such as stamp duty, legal fees, building and pest inspections, and loan set up costs. Before purchasing a property for investment, make sure you are aware of all the costs you will incur and that you have enough money for them. This will help you determine the budget you have for a property and whether or not the investment will have the potential for long term returns.

Tax implications
Even though there is the positive of tax deductions in investing in property, you must also be aware of the potential impact that capital gains tax has.

*A capital gains tax is the tax you are responsible to pay if you are generating a profit from the sale of a non-inventory asset.

In negative gearing, success comes down to the investor, the property, and the amount of income is earned from rent. If your investment makes a loss, you have to rely on capital growth to provide you with investment return. To fund this strategy, you need to ensure you have sufficient cash flow. You also need to expect and be prepared for loan repayments and interest rates to increase.

Seeking personal tax advice is always a good idea to help you achieve the best in your investment.

There are no guarantees
A very popular belief is that a property will increase in value over time. However, this is not always the case. Before purchasing a property for investment, think about its potential capital growth. This is the rate at which the value is expected to grow. You also need to research the current market, or use the help of a licensed real estate agent to see the amount of rental property income you will be earning. You need to weigh up the ongoing costs and if you will be able to continually afford to pay them. These costs include maintenance, insurance and property management fees.

The amount of equity your investment has is also no guarantee. The value of your property investment can increase or decrease depending on the market. Also, just because you have equity in a property, it doesn't always mean you can automatically use it to borrow for another investment. Everything is dependent on the lender and their loan criteria.

Possibility of 'bad' investments
If you decide to make changes to your property through renovations, you want to make sure these will actually add value to your property and will end in an increase in profits. The costs of renovating might outweigh the benefits and it's definitely something to research before spending your money on expensive trades and labour.

A successful investment is the result of careful planning. When investing in a property you want to make sure you are clear on your goals and what is realistic for you to invest in. You also want to do as much research as possible as this is a very significant expense where you risk losing generous amounts of money and time if it's not carefully planned out. Research suitable suburbs for the type of property you wish to invest in, find out what the market is like and what similar properties are achieving. Set a budget. Not for just the big things, but the little fees and costs that will add up and are where investors usually go wrong. You also need to make decisions like who will manage your property and if you want insurance. Overall there are lots of aspects to consider in property investment. So make sure you do your research before you take the leap so you can set yourself up for success.

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