Investment Properties: What to Know and Are They for You?

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There is a lot of buzz out there about investment properties. In fact, Australia is home to about 2 million property investors!

And with popular TV shows making them seem like the easiest (and most fun) way to make a lot of money, many people are considering adding investment properties to their portfolios.

But before you jump-in, make sure you understand the ins and outs of the investment property market to help determine if it’s really for you.

What Are Investment Properties?

An investment property is a residential or commercial real estate property that was purchased with the intent of earning a profit. This profit can either come through rental of the property or through resale. Depending on the method in which the investor plans to make money, investment properties can be either short or long-term investments.

An example of a short-term investment property is a flip. This is where investors buy homes, update them, and sell them for a profit.

An example of a long-term investment property is a rental. In this case, investors buy a home and maintain it while they rent it out for (hopefully) more than the cost of the mortgage.

And while anyone can invest in investment properties, the typical Australian investor is a self-employed male who makes between $79,000 and $100,000 a year. He is more likely to be married and around 42 years old.

It is likely that this profile is representative of most investment property investors because these investors are generally homeowners who bought a second home to earn extra income. Or, they are homeowners who bought a new home and kept their old one to rent out for extra income.

And people are likely to invest in investment properties for a variety of reasons.

Here are some of the benefits:

Pros

Generally speaking, property as an investment is easier to grasp and understand than other forms of investment. It requires no specialised knowledge and is a tangible asset that an investor can see, check-up on, and appreciate.

With that, an investor can also clearly see from where his or her returns or diminishes are coming from. This is not always the case with other forms of investment.

Investment properties are also less volatile than other forms of investment. For the most part, real estate increases its value over time. So, even if the investor is not getting rich off the property, he or she can expect not to lose a ton of money either.

Even when real estate goes down in value, if an owner is willing to stick it out, he or she can typically expect the property to regain value over the long haul.   

Investment properties may also provide the owner with tax deductions that he or she might not be eligible for otherwise. The tax deductions can help offset any operating, banking, or maintenance costs associated with owning the property.

Cons

While investment properties were ones deemed as a key to Australia’s housing boom, there is evidence that it is starting to slow down. A lot of that speculation has to do with regulatory changes in the lending market.

In the last two years, Australia’s biggest banks have raised minimum deposits and tightened eligibility requirements for borrowers—making getting into the investment property arena harder and more expensive.

Furthermore, they have increased rates on interest-only mortgages.

With interest-only loans, investors can take out a home loan and focus only on paying back the interest–even though they will need to pay back the principle eventually. Initially focusing on only the interest allows the investor to retain more of the profit from the investment until repayment on the principle begins.    

But while these types of loans become more and more scarce, and the cost of borrowing money is going up, the risk of losing or not earning money on an investment property becomes more realistic.

This is particularly true when considering long-term investment properties as rentals. Owners may realise that the market rental rate (and therefore their rental income) does not cover mortgage and other maintenance expenses of the property. They are then left to figure out how to cover the costs.

Worse yet is in the event that an investor is unable to find a renter.

While many rental markets in Australia are still booming, it is important to make sure that you understand any rental market you enter to try and avoid owning a property with no tenant.

Should I Invest?

While everyone’s timeline is different, it’s best to consider your own circumstances when determining the best time and if you should invest in investment properties.

First, consider your own living situation. Do you own your own home or are you renting? If you are currently a renter, or living with your parents, it might be best to first establish your own residence before diving into investment properties.

This will give you experience in the home buying process and help you determine if being a homeowner for investment purposes is a good fit for you.

Maintenance, repairs, and upgrades can be burdensome and expensive. But, if you enjoy challenges and are handy with plumbing, electricity, and carpentry—odds are, investment properties are right up your alley.

Also, be sure that your financial situation is favourable for buying and owning an investment property. Most people know that acquiring the loan to buy the property can be expensive, but upkeep is a recurring cost that not many people anticipate.

And, as with any business, you don’t want to run out of operating capital in maintaining your property.

If you decide to go down the investment property route, ensure you buy in an area set for growth, and one that you can afford in the event you don’t find a renter or your flip doesn’t sell immediately.

The key to investment properties is to be able to buy at a time and in an area where you can add value. What you are able to add depends on your current financial and living situation.

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