A smart guide to residential property investment

Residential property is a smart investment option for many Australians – but you need to approach it with the right strategy. Whether you’re growing your investment portfolio or looking to purchase property in a different suburb, it’s essential to know the pros and cons. This guide will help you identify if residential property is the right investment option for you.

3 big benefits of residential property investing

Let’s start by exploring the pros of investing in residential property. After all, you need to know that your money is always working for you:

  • Rental income: By renting out your property you can earn regular payments from tenants. If you don’t need to borrow much to purchase the property, this could be a good option for investors looking to step back from work while still maintaining a steady income. However, make sure you understand the difference between a negatively geared and positively geared home – and how that will affect your money.
  • Tax benefits: There is a range of tax benefits and deductions that may be claimed on a residential property, from capital gains exemptions to depreciation advantages and more.
  • Capital growth: There is the opportunity to earn capital growth (a profit) from the sale of a property at a later stage, if the value has increased. The good news is that over the long term, property prices always tend to trend upwards.

Beware of these cons

The bad news is that if approached incorrectly, property investment can result in a net loss. However, if you are aware of some of the downfalls, you will be better prepared to avoid or overcome them, including:

  • High entry and exit costs: The buying and selling of property can be an expensive exercise. You’ll need to pay the deposit (generally at least 20%), stamp duty, building and landlord insurance, agency and legal fees when buying. While selling a house involves costs such as marketing and agency fees, mortgage discharge fees, legal costs and capital gains tax. Also consider the general expenses while you own the property, including interest on a home loan, land tax, repairs and expenses (directly related to the upkeep of the property) and property agent fees and commissions.
  • Vacancy: While the hope of property investors is to always have tenants, there may be periods where you won’t and will have to cover the costs yourself. This can be expensive if the property remains unleased for some time.
  • Market downturns: Residential property is generally considered a safe, low-volatility investment compared to playing the stock exchange, for example, but it’s important to know that the property market fluctuates. Not only can there be a downturn in sales, but interest-rate changes often impact buying and selling trends as well.

What to consider before you buy

So you’ve decided to take the plunge and invest in a residential property. What are some key factors to ponder before scouring the market? Start by focusing on the:

  • Location: Where will you buy and why? Research the area’s recent market trends and find out the price of similar-sized homes that have sold in the previous few months.
  • Budget: What is your borrowing capacity and what will your repayments will be? This will also determine how much your rent will need to be, so review the median rent price in your chosen suburb and the current rental vacancy rate.
  • Loan type: What type of loan is best for you? Are you looking for a variable or fixed rate? Interest only or interest and principal?
  • Obligations: Do you know what your obligations are as a landlord? These vary between states and territories and include notice periods, repairs and maintenance, and bond.
  • Additional costs: Factor in potential extras such as council rates, water bills, strata or body corporate fees, insurance, repairs, maintenance and property management fees.

TIP: Download this handy guide from the Australian Taxation Office (ATO). It was designed to help investors better understand expenses and income relating to rental properties.

How to reduce your risk

There are various ways you can reduce your risk when buying a residential investment property.

  • Stick to your budget: This should be top of your to-do list! Always have a complete and accurate picture of your financial borrowing position, and don’t be swayed by sales agents or stressful auctions.
  • Shop like an investor: It’s easy to fall in love with a property, but remember that you’re on the hunt for an investment home, not somewhere to live yourself. Logic trumps emotion for experienced investors.
  • Seek out professional advice: If the bank has valued a property at a certain price, it’s dangerous to disregard their figure and pay more than it’s worth. A surveyor will also be able to flag any issues with the property that may result in further expenses.
  • Shop smart: Do your research and choose properties in growing areas with high livability, great nearby amenities (including public transport) and strong buyer/renter demand.
  • Choose the right property: This may mean buying a low-maintenance property that’s close to good schools and shopping centres, or has lifestyle appeal, such as being near the beach or the inner city. A property that caters to a wide variety of renters – from singles and couples to families and retirees – is key.

If you have an investment property, we can help protect your valuable asset with our Landlord Insurance.