The Pros and Cons of Property Investment
When it comes to investing your hard-earned cash, there are many investment options available – but my favourite is property.
In my mind, if you want to develop financial freedom, you need to choose an investment vehicle that will generate wealth-producing rates of return.
I know of no better option than property based on its reliability and performance advantages compared to the alternatives.
But successfully investing in property isn’t as straightforward as you might think.
There are many pros and cons of property investment, and you need to be aware of all of them in order to ensure you have the best chance of success.
The facts speak for themselves…while many investors start out with the best intentions of making it big in property investing, only a handful will ever get past their first investment.
Rather than making the same mistakes the average Australian property investor makes, let’s look at the benefits and downsides of property investment to stack the odds in your favour.
Here is everything you need to know about the pros and cons of property investing.
Benefits of an investment property
Here are 13 benefits of property investments:
1. More property millionaires
One could observe that investing in property appears to be a financially sound decision based on the positive outcomes of others.
Property has consistently been the major source of wealth for Australia’s multi-millionaires.
And it’s the same all over the world.
And those that have made their money in businesses other than property generally invest their money in real estate.
2. Anyone can do it
It isn’t only the affluent who can invest in property.
It doesn’t really take large sums of money to get involved in real estate.
Banks will typically lend up to 80% or higher of the property price, making investment properties accessible for Australians with steady employment and some funds to put towards purchasing them.
3. Property investment helps to provide security and stability
Residential real estate investments are considered reliable as they are physically observable assets. However, I would like to explore why I think they are among the safest, and potentially most lucrative, investments in Australia.
Residential property has outperformed all other investment assets over the past two decades, and that even includes shares.
That’s because, as a bricks-and-mortar investment, the property is more stable than investing in assets such as shares – Australia’s property market is robust and has a built-in safety net in that it is the only investment market not already dominated by investors.
In fact, as many as 70% of property owners are owner-occupiers, with investors accounting for the remaining 30%.
You don’t have to believe me when I say that residential property is a secure investment.
Just ask the banks.
Banks have always considered real estate, particularly residential, as superior collateral.
Note: The reason banks can give you up to 80% of the value of your home is because they are certain that its value will not drop in the long run. In reality, the entire Australian banking system is propped up by the steady increase in residential property values.
The total value of Australia’s residential property market is worth around $9.5 trillion and there is only around $2.3 trillion in debt against this.
That’s because around half of all Australians who own a home don’t have a mortgage against it, having paid it off years ago.
4. Property investment provides an income stream
The rental income obtained from your investment property enables you to get a loan and get the benefit of leverage by helping you pay the interest on your mortgage.
The rental income property investors have earned through the years has gone up and it has risen faster than the inflation rate.
And with a shortage of well-located properties at present, at a time when our immigration is booming, it’s likely that rents again to keep rising strongly.
5. Property investment builds wealth
Well-located capital city residential property has an unequalled track record of producing high and consistent capital growth.
Over the past 45 years, the value of the average property in all capital cities has doubled every ten years or so.
Of course, residential real estate does not always increase in value.
The property market moves through cycles and each boom leads to the next downturn just as each downturn paves the way for the next boom.
That’s why property investment should be seen as a long-term (10 years +) investment.
6. You can buy it with someone else’s money
The beauty of the real estate is that instead of buying it with your own money, you use someone else’s money to buy your properties.
That is, you put down a small deposit, often 20 per cent, and the bank finances the rest. This is called leverage.
7 . You are in control
Investing in property is a great idea because you have complete autonomy over the decisions you make and you can directly determine what returns you get from it.
If your property is not yielding satisfactory profits, you can increase its value by renovating or furnishing it to make it more appealing to tenants.
In other words, you can directly affect the profits from your rental property by understanding what tenants require.
8. Property investment gives tax benefits
The majority of the costs associated with owning an investment property can be deducted against your annual tax bill, to help reduce the amount of overall tax you pay for the year.
Not only that, but you can also usually make a claim each year for depreciation, which is an allowance for the wear and tear of the property over time.
You can claim tax benefits on the following:
- The cost of advertising and marketing for new tenants
- Loan interest and bank fees
- Body corporate fees and charges (not including special levies)
- Building, contents, landlords, and public liability insurance
- Council rates
- Property management fees
- Depreciation, relating to the wear and tear of the building and its contents
- Negative gearing
- Gardening expenses
- Land tax
- Utility fees (where it’s not paid by the tenant)
- Pest control
- Repairs and maintenance
- Some legal costs and lease document preparation expenses
- Capital gains discount
As you can see, there are several options for an investment property to reduce your annual tax bill.
READ MORE: How does owning an investment property affect taxes?
9. You can add value
One can boost profit and the worth of your investment property in many different ways, from small tasks such as applying a layer of paint or discarding the rug and buffing the floorboards, to undertaking large renovations and developments.
10. You don’t need to sell it
You don’t have to sell property to make money from the value growth, as opposed to other investments.
Tips: Go to your bank or finance broker and ask them to raise your loan to use the additional funds as a deposit for your next property purchase.
11. Property is an imperfect market
When I look to invest, I want to invest in an imperfect market.
This means that I’m more likely to be able to buy an investment below its true value, or I can sell above its true value.
Let me explain this in more detail.
The world of shares is not a completely perfect market, but it’s about as perfect as it gets.
That’s because it is a liquid market where investors are well-informed.
I can buy stocks at the same price as anybody else can.
In general, the overall marketplace has the same information as I have, because, for the most part, the information is equal.
This shared knowledge creates a more “perfect” market.
On the other hand, real estate is what I would call an imperfect market.
I know many people who have bought properties at 5, 10, or even 15 per cent below the real market value.
If the property was a perfect, liquid marketplace, you would not be able to buy a property considerably below its intrinsic value.
I can do this every time, and so could you because information, contacts, and expertise help you get an insider’s edge in an imperfect market.
12. You can insure against risks
Another factor that adds to the security of residential property as an investment is that you can insure it against most risks.
You can insure the building against fire or damage and you can insure yourself against the tenant leaving and breaking a lease.
13. Most forgiving
Even if you acquired the worst property when it would be the least advantageous to do so, the chances are good that it would still go up in value over the next few years.
Note: History shows that real estate is one of the most forgiving investments you can make over the long-term. If you are willing to own property for a long period of time, the value is sure to increase.
Mind you, I’m not advocating wasting time, money, and effort buying not-so-good properties at the wrong time in the cycle.
As your mentor, I would prefer you learned how to choose wisely in the first place.
If you do this, then even if you are a Beginner Investor, you can buy the property and be comfortable that you won’t see the value of your asset decline over the medium term.
Disadvantage of an investment property
When thinking about property investment, there are a lot of pros, but it’s also important to consider the cons.
Here are four disadvantages of property investment.
1. High entry costs
One of the downsides to property investment is that you need a lot of cash behind you.
Unlike some other assets, you can’t buy a property for nominal amounts – the cost of an investment-grade property starts at around $500,000 and can easily cost millions in today’s market.
This makes saving a deposit to buy your first property challenging – and that is hardly the only cost.
Other fees involved include stamp duty, legal charges, buyers’ agent’s fees, and more.
Sure there are affordable properties around Australia, but there’s a reason they’re affordable.
If you want to become wealthy through the property you need to buy investment-grade properties but concurrently less than 4% of the properties on the market would fall into this category.
Of course, any property can become an investment property.
Just move the owner out, put in a tenant and it’s an investment, but that doesn’t make it “investment grade”.
2. There are ongoing costs to take into account
As a property owner, you are responsible for maintaining and repairing the property, which can be costly.
Think insurance, council rates, maintenance, repairs, and renovations.
Then of course there are your mortgage repayments, and the interest you need to pay on them.
These might be regular expenses, or they might come out of the blue.
But interestingly, the tax man has your back.
These costs of running an investment property are tax deductions because, in reality, you are running a small business providing accommodation.
Another cost to consider is the negative gearing that occurs when your rental income doesn’t cover the full amount of expenses incurred.
Again this is a tax deduction, and many investors top up this negative cash flow by using their savings, but savvy investors would look to set up cash flow buffers in a line of credit or offset account in order to cover their negative gearing.
3. Property is generally illiquid
Unlike shares or some other assets, you can’t expect to pull your money out of property investments any time you want.
Depending on the location and the time in the property cycle, it could take months to sell your property.
This disadvantage can put you in a difficult situation if you need to cash in quickly, but it is this lack of liquidity that makes the residential real estate market more stable as opposed to the volatility of the share market.
4. Not All Properties Increase in Value
In general property investors expect their property to increase in value, but that’s not always the case.
Properties may decline in value due to market fluctuations.
This means you could even end up owing the banks more than the property is worth.
This is known as negative equity.
That’s why it’s important to choose the right property in the right location – in fact, location does 80% of the heavy lifting of your property’s capital growth.
5. Tenant troubles
One of the biggest fears of many beginning investors is that they might end up having difficult tenants, or no tenants at all.
No tenants means no rental income… and no cash flow can seriously hurt your finances.
Of course, currently, we are experiencing a severe rental crisis with a shortage of available properties to rent, so the lack of tenants is not a real concern at present.
However you could end up with a problematic tenant, even good tenants can become bad if they run into difficult personal circumstances.
That’s why it’s important to employ a proficient, investor-savvy, property manager, like the team at Metropole Property Management, to minimise the risks of problematic tenants.
Investors should always work with a buffer in case this occurs.
So, is property still a good investment in Australia?
Despite these cons, the property is an excellent investment prospect.
Property investment ultimately helps thousands of Australians achieve financial freedom.
But only if it’s done right.
Note: To become a successful property investor you can’t just go out and buy any property.
You need to buy the right property in the right location.
It’s what I like to call an ‘investment grade’ or ‘A-grade’ property.
And, in my mind, less than 4% of the properties on the market currently are what I call “investment grade.”
A-grade or investment-grade properties are not only situated in the most expensive suburbs… and don’t all come with a multimillion-dollar price tag.
What makes an A-grade property in one suburb may not be appropriate for a different demographic in a different suburb, but an A-grade property will always have a pool of buyers, regardless of the market conditions.
Also key is that when buying an A-grade property, investors would rarely need to make compromises as it tends to “tick all the boxes”.
Meanwhile, B-grade investment properties might come with compromises such as position, street, or orientation.
Then many compromises would be made when purchasing a C-great property like living on a busy road or having an impractical floor plan.
Note: Getting a good team around your property investment decisions will allow you to build a property portfolio that will go a long way to replacing your income in the future.
You must, first, learn that property investing is not a get-rich-quick scheme, and to achieve your future financial goals you will have to slowly build a substantial asset base and not chase short-term cash flow as many beginning investors do.
You need to formulate a plan, be cautious of the advice you receive, be prepared to pay for advice and understand the difference between a salesperson and an advisor.
The residential property market is worth well over seven trillion dollars today and over the next decade, it will increase in value by billions and billions of dollars.
If you invest effectively and with the right knowledge, you can have your share.
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