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Investing in bricks and mortar

(An article from Equity Nov 2013 by Robert Drake)

Buying a property to rent out is a popular form of investment. Houses and units are easier to understand than many other forms of investment, but they do have some issues you need to be aware of. 

Potential benefits of investing in property include:

  • It can be less volatile than some other investments.
  • If you take out a loan to buy an investment property, the interest on the loan is tax deductible.
  • You can earn rental income and benefit from capital growth if your property increases in value over time.

However there are pitfalls to watch out for:

  • Rental income does not usually cover your mortgage payments and all other expenses.
  • Any 'jump’ in interest rates will affect your return if you have a variable rate loan.
  • You need a tenant to ensure regular income.
  • You can't sell off part of your investment to get some cash in a hurry.
  • There are high entry and exit costs. This includes costs such as insurance and property management.

If you invest exclusively in one property, you will have a lot of money riding on one small market, for example the North Sydney apartment market. If you also own your home, you'll have all your wealth concentrated in the residential property market.  This is poor diversification and increases your risk. Think about other investments such as managed funds that allow you to invest in shares and properties across several markets.

Where and what you buy will affect your return on investment. Look to buy in a high-growth area where there is potential for capital gains. Find properties that appeal to tenants and ideally attract more than one segment of the rental market such as singles, couples, young families or retirees. Consider low maintenance properties to reduce your costs.

In recent years many people have realised that the myth about property always increasing in value is just that, a myth. For example, the value of Gold Coast units, which are regularly recommended by property developers, fell by 17.9% between February 2008 and March 2013 (source: rpdata - Rismark 2013).

You should also think twice before using the services of related groups of advisers such as property developers, accountants, lawyers and mortgage brokers who work together and recommend each other's services. Do your own research and work with your own advisers. 

Many people borrow to invest in property. Remember, the more you borrow, the more you stand to gain or lose and the more it costs you in interest expenses. That's why you have to be very sure that your property will earn a positive return over time.

Investing in property is a good way to grow your assets. But before you enter the property market, do your research and make sure this type of long-term investment is for you. 

Visit the Moneysmart website for more guidance on investing in property and managing a diversified portfolio.


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