Investing in property

Just like cash, shares, stocks and deposit account products, a property might be an option to investors who would like to put their money to work. Whether for a passive supplementary income, a pathway toward financial independence or a retirement plan, real estate might offer you an efficient way towards achieving your financial goals.

Why invest in property?

Rental income may give an investor a consistent revenue stream each payment cycle, while the property itself might also accrue capital gains (that is, an increase in value). The Reserve Bank of Australia presented in September 2015 Bulletin that there has been a general increase in property value over time¹ and while there can be peaks and troughs, over the long term, value increases have tended to be positive. If you retire, the property you invested in when you were younger could help with funding your retirement.

The real estate industry can also be a complex industry and might be difficult to navigate even for the experienced investor, let alone for a first timer. Here are some basics on what you may like to consider about property investment.

Financing your investment

To begin your journey towards property investing, you may find that capital can be important to make your first purchase. While some people have the capital from their income or other revenue streams to buy outright, other potential investors may not have this luxury. Instead, many Australians may rely on mortgages to purchase their first investment property, in much the same way as purchasing a first owner-occupied home.

Variable- and fixed-interest loans

Over a period of time, the variable interest rates offered by a lender will fluctuate depending on a variety of economic factors. Sometimes, they will drop, resulting in smaller repayments, but they can also rise, which means that interest rates will also rise.

This is the essential difference between variable and fixed interest loans, particularly when it comes to investment properties. If for example, you are servicing two mortgages at the same time (one on your home and the other on an investment), a variable interest loan is liable to change which can be partly influenced by decisions made by the Reserve Bank of Australia (RBA) and can either be helpful or detrimental. This is a risk to consider when investigating this particular type of loan.

On the other hand, fixed-interest loans allow you to know exactly how much your repayments are going to be each month for a set number of years, regardless of wider economic changes such as a shift in interest rates by the RBA. This means you are protected when interest rates rise but do not benefit if they fall.

One particular option to note is the split loan: this allows you to put some of your loan in a variable interest arrangement, and some on a fixed basis. This could allow you more certainty in relation to repayment, but some flexibility if the market changes.

Interest-only mortgages

Fixed Interest mortgages with interest-only repayments are becoming a ubiquitous form of loan for investors, with more than half of new investment loan approvals over the last few years being of this type². These loan arrangements may only require you to pay back the interest over a set period of time, then convert to interest and principal repayments for the remainder of the loan term.

As such, your repayments are smaller for the first few years but would increase once the fixed interest period ends. However, consider consulting an expert to discuss options for structuring a mortgage for your unique set of circumstances.

Unit or house?

In addition to considering how you can finance in an investment property, you may start thinking about what kind of property you are going to look for. Generally, real estate is split into two distinct types: Units and houses.

Units

Units are typically thought of as apartments, but they can also exist in other forms as well. They tend to be smaller than houses, and as such may also be cheaper. In fact, the majority of investment housing tends to be focused around units³.

In addition, just because they are likely to be the cheaper option, may not necessarily mean that they are any less effective at accruing capital gains. Depending on the geographical location and current market trends, units may outpace their housing counterparts.

One other factor to note about apartments is that landlords have to deal with strata law: which is legislation which defines ownership of apartments as well as common property inherent to these types of constructions, such as foyers and swimming pools⁴. Depending on where you purchased your property, additional obligations and legal considerations can vary across states and local governments.

Houses

Houses, on the other hand, tend to be larger, more expensive and focused around suburban areas, while apartments tend to have higher concentrations within metropolitan regions.

As an investor, you will generally need more capital for a house compared to an apartment, but the rental income may be comparatively higher. You may also attract different kinds of tenants to a house, such as young families rather than students. A suburban location could net you some land which can tempt some tenants, while units will tend to lack this additional feature.

Both houses and units have advantages and disadvantages to an investor, and the effectiveness of each kind of property may depend on the location – within suburbs, cities, and states.

Regional or capital city?

Which brings us to the question you will need to consider of whether or not to invest in a capital city of regional area. When thinking of property investment, many people may only consider the capital cities to be worth the expense. However, regional areas may also offer a good opportunity for Australians willing to cast their net a little wider.

The push for affordability

The prices of homes in these outer areas may subsequently increase in value as a result of a potential increase in demand, so people head out even further, and so on. This is sometimes known as the ripple effect, and can be a major factor driving regional value growth. You may find that regional centres and properties may be less expensive, which may make them an easier option for first time investors.Consideration of your investment purchases may need to reflect current market trends or driving future forces. In some capital cities across Australia, people may be priced out of the market and are having to head further away from city centres in order to afford a home or investment property at a reasonable cost⁵.

Build or buy?

Next, an investor may need to consider whether they would prefer to build a new home or buy an established one.

Building a home may seem like a difficult project, but there are some options that people may find more simple to work with rather than going it alone. Buying off-the-plan can allow you to have a home built as part of a larger development, and can sometimes be a cheaper option. However, it may take some time for the build to finish

Established properties can be a simpler decision for some, but may also come with their own issues. Furthermore, established homes may have some issues due to their age that a new home that uses modern architectural techniques might be less likely to suffer from.

Insuring yourself

One step in your investment journey is sorting out insurance. Consider insurance packages that can help protect you from financial loss due to property damage from such things as fire, theft, tenant damage and possibly more. While in an ideal world, your investment would be free from risk, this is not always the case in reality.

This step is no less integral than finding the right type, location and style of property, so consider the options to help minimise the financial risk as a result of potential damage to your investment property.

Ultimately, what works for one property investor may not work for another, so consider speaking to a property or financial professional to help with making a decision about your property investment options.

Enquire about a competitive IMB Bank Investment Home Loan

Source:

1. Reserve Bank of Australia, Long-run Trends in Housing Growth, September Quarter Bulletin 2015