The pros and cons of buying an investment property. 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.
Buying an investment property can be an effective strategy for building wealth and securing your future. It can help improve cash flow, offers tax benefits and is seen as more stable than other investments – after all, everyone needs somewhere to live.
Pros. Less volatility – Property can be less volatile than shares or other investments. Income – You earn rental income if the property is tenanted. Capital growth – If your property increases in value, you will benefit from a capital gain when you sell.
Take the time to factor in your everyday living expenses, existing debts, financial commitments, and realistic rental income and expenses. Generally, you'll need 20% of the property's value (which is determined by the bank's valuation of the property) as your deposit, to avoid paying Lenders Mortgage Insurance (LMI).
Average real estate return on investment
The average rental yield in Australia is around 8%, with 1% accounting for ongoing costs like dues, strata and insurance fees.
Australia's six year absence rule allows you to turn your primary place of residence (PPOR) into an investment property and collect rent and claim depreciation for up to six years provided you've stopped living there. When it comes time to sell you won't be liable for capital gains tax or CGT for those six years.
What is a good rental yield? A good rental yield in Australia falls anywhere between 7% and 8% for capital city suburbs. In the regional areas, houses bring rental yields of 12% to 13%, while you can expect rental yields of 8.5% to 11% for units.
Should you pay off your primary home or rental property? It really depends on your circumstances. It is wise to pay off any debt at all if you want equity. However, it is also wise to use the money to invest in a second investment property, especially if you're going to generate more wealth in the long run.
Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent. Ideally, an investor should seek a mortgage loan with monthly payments of less than the 1% figure.
You need at least $25,038 in deposit for a $300,000 house as a first home buyer or if you aren't a first home buyer you'd need to pay $3,000 extra in stamp duty, meaning you'd need at least $28,432 in deposit on a $300,000 home in Queensland.
Commercial Real Estate
One reason commercial properties are considered one of the best types of real estate investments is the potential for higher cash flow.
Fixed interest and cash investments will generally be low risk (defensive assets) and assets such as property and shares are generally considered to be high risk (growth assets).
If in a good area with good tenants the property may very well outperform the super fund, but you are talking on additional risks by putting a substantial amount of money in just one investment and not diversifying.
You may continue treating your first home as your main residence for capital gains purposes when you stop living in it and rent it out for up to six years. You must consult your tax adviser to determine the capital gains tax implications from the sale of your property.
To determine whether a property is a good investment using the 2 per cent rule, simply multiply its purchase price by 0.02. For example, if you're going to purchase a property valued at $200,000 then the monthly rent should be at 4,000 or more to meet the parameters of the 2 per cent rule.
Selling part of an investment property
There are a number of potential benefits to this approach: You'll pay less Capital Gains Tax. You'll have access to additional capital that you can use to invest in other property or elsewhere. You'll still stand to benefit from returns on the investment over time.
You'll typically need a 20% deposit to buy an investment property. This can come from your savings or equity from your existing home.
For example, those who invest in their 20s and 30s will begin earning cash flow sooner than their peers. Over time, as they pay down the debt on those properties, they can either a) maximize cash flow on debt-free properties; or b) refinance those properties with new, long-term debt.
Three indicators tell you whether to sell an investment property: the rental yield is too low, capital growth is slow or non-existent, or there are expensive repairs on the horizon. Generally, if you feel like selling could give you more money than keeping an asset, it may be worth doing so if possible.
Another way to avoid or reduce CGT is by increasing your property's cost base. This is the cost of acquiring, holding, and disposing of a property, and is subtracted from the selling price to give you your capital gain. According to the ATO, the cost base of a CGT asset is made up of: The money you paid for the asset.
According to Vanguard Index Report, Australian shares averaged 9.8% in gross returns per annum over thirty years to June 2022. This makes it the highest-returning Australian asset class out of the four.
The strongest capital city markets – the ones that are defying downturn pressures – are the ones that offer the most affordable prices: Adelaide, Perth and Darwin.