Helpful Tips to Investing In Property

If you’re thinking about investing in property, chances are you probably have a few commas in your bank balance. That said, it carries certain risks that should be understood before building a portfolio.

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Written by

Luke Carlino

Edited by

David Rayfield

Reviewed by

Debbie Shankar

Updated 15/04/2024

What changed?

Fact checked

Written by

Luke Carlino

Updated 15/04/2024

What changed?

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What are the Pros and Cons of Property Investing?
What do I need to consider before investing?
What kind of costs are involved?
Why is diversification important?
Can I get a home loan for an investment property?
Where can I find and compare Home Loans?

Australia’s property market is generally perceived by many as less of a risk when compared with other investment options. The total value of residential dwellings in Australia experienced a remarkable surge of $261 billion in the September quarter of 2023, bringing the figure up to $10,267.4 billion.¹ These numbers indicate that property investment is a highly favoured avenue for wealth creation among Australians. 

This substantial increase in residential property values also reflects the Australian property market’s resilience and, therefore, attractiveness among investors.

What are the Pros and Cons of Property Investing?

Property offers a range of compelling advantages, making it an attractive choice for many investors. But it also has significant financial and operational challenges. Before embarking on a property investment journey, it’s essential to evaluate the disadvantages carefully and have a well-thought-out strategy to mitigate the potential downsides.

Let’s go through some of the pros and cons:

Pros	Cons
Income: Owning an investment property generates a steady income stream through rental payments. As long as your property is tenanted, regular rental income can provide financial stability and cover expenses related to the property.	High Entry and Exit Costs: Property transactions involve substantial expenses, which can add up significantly when purchasing or selling a property, impacting your overall return on investment.
Less Volatility: Property investments tend to be less volatile than other financial assets. The property market tends to experience slower and steadier price fluctuations, reducing the risk of sudden, significant value drops that can be common in stock markets.	Fluctuating Interest Rates: Property investors are vulnerable to fluctuations in interest rates. A rise in interest rates can result in higher mortgage repayments, reducing your disposable income and potentially affecting your overall profitability.
Tax Deductions: Property investors enjoy various tax advantages. When calculating your taxable income, you can offset many property-related expenses against your rental income.	Extra Costs: Rental income may not always cover mortgage payments and other property-related expenses. This situation can lead to ongoing out-of-pocket costs, which can strain your finances.
A Straightforward Strategy: Property investment does not typically require specialised knowledge or expertise. While it’s essential to research and understand the basics, you don’t need a deep understanding of complex financial instruments or markets.	Vacancy: There may be periods when your property remains unoccupied, leaving you responsible for covering all expenses impacting your cash flow and financial stability.
Capital Growth: Property has the potential for capital appreciation over time. If your property’s market value increases, you’ll receive a capital gain when you sell it. This growth potential can significantly enhance your overall investment returns.	Hard to Liquidate: If you need access to cash quickly, you may need to sell the property, which can take time and may not align with your financial needs.
A Tangible Asset: Property is a tangible asset you can see and touch. Unlike some investments that exist only in the digital realm, owning a physical property provides a sense of security and can be easier to understand for many investors.	Loss of Value: Property values can fluctuate, and there is a risk that the value of your investment property may decrease. If property values decline significantly, you could find yourself owing more on the mortgage than the property is currently worth, a situation known as negative equity.

What do I need to consider before investing?

It’s crucial to align your property investment strategy with your financial goals and risk tolerance. The following factors better position you for a potentially rewarding and less risky property investment experience.

A well-rounded investment plan will help determine how property fits your financial objectives:

Research the Property Market: Thoroughly researching the property market is essential. This includes analysing the macroeconomic factors affecting the overall market and the microeconomic factors specific to your interest. Understand historical property trends, current market conditions, and potential developments that may impact property values and rental demand.
Location, Location, Location: The location of your investment property is critical. Different areas will offer varying levels of return on investment. Look for areas with a history of high growth in property values, as this can contribute to capital gains over time. Additionally, consider areas with higher rental yields, which can provide a steady income stream. Low vacancy rates indicate a strong rental market, reducing the risk of prolonged periods without rental income.
Property Type and Condition: The type of property you invest in and its condition can significantly affect your return on investment. Consider whether you want to invest in residential or commercial. Assess the property’s age, maintenance requirements, and potential for future renovations or improvements that can increase its value.
Financing and Budgeting: Determine your financing strategy, including how much you can afford as a deposit and how you plan to finance the remainder through mortgages or loans. Set a budget that includes the property purchase price, applicable stamp duty, settlement fees and any ongoing expenses like property management, maintenance, and insurance.
Risk Mitigation: As with any investment, there are risks associated with property investing. Consider strategies for risk mitigation, such as diversifying your property portfolio across different locations/property types or investing in property through a Real Estate Investment Trust (REIT) for a more diversified exposure to the property market.

What kind of costs are involved?

Property investing costs can impact your overall return on investment, so understanding them is important. The most significant cost is, of course, the property’s purchase price, which includes its negotiated price and associated costs. 

Stamp duty is the primary associated cost, a tax imposed by state governments and calculated based on the property’s value. You must also factor in the cost of engaging solicitors or conveyancers during the purchase process.

Interest on Loans: You’ll incur interest payments if you finance your property purchase through a mortgage or loan. The interest rate can vary depending on your loan terms and market conditions.
Loan Fees: Lenders may charge fees for originating and servicing your loan, including application fees, ongoing fees, and exit fees.
Property Management: If you hire a property manager to oversee your rental property, you’ll need to budget for their fees, typically a percentage of the rental income.
Maintenance and Repairs: Property upkeep is essential to maintain value and attract tenants—budget for ongoing maintenance and unexpected repair costs.
Insurance: Property insurance, such as Landlord Insurance, protects your investment from various risks, including damage, theft, and liability claims.
Council Rates and Strata Fees: If you own a property in a strata-titled complex or community, you’ll be responsible for paying strata fees, which cover common property maintenance and expenses. Council rates are also an ongoing expense.
Income Tax: Rent is subject to income tax. However, you can offset many property-related expenses to reduce your tax liability.
Capital Gains: If you sell your property, you may be liable for tax on any capital gains. Some exemptions and concessions may apply depending on your circumstances.
Capital Works Deductions: While not an immediate cost, understanding the potential depreciation benefits of your property can impact your long-term tax position positively.

Why is diversification important?

Want to be careful about the potential impact of poor performance in any single investment? Diversification could be a good solution.

Diversification is a fundamental principle in an investment strategy that involves investing across different types of assets or asset classes. This strategy reduces risk and enhances the potential for more consistent returns. When you have all your money concentrated in one asset, such as stocks, real estate, or a particular industry, you are exposed to the risks associated with that asset. If that asset performs poorly or experiences a downturn, your entire portfolio may suffer significant losses. By diversifying, you spread the risk, making your overall investment portfolio less vulnerable to the fluctuations of any one asset.

Diversification should be a fundamental consideration in any investment strategy to help achieve your financial goals while managing risk effectively.

Can I get a home loan for an investment property?

Many financial institutions provide specialised home loans for property investors. Consequently, it is advisable to research these options or consult a qualified mortgage broker who can assist in customising a mortgage that aligns with your unique financial situation and investment objectives.

One noteworthy strategy to explore is tapping into the equity you have accrued in a property you already own to fund an investment property. This approach allows you to leverage the value of your existing real estate holdings to expand your investment portfolio. Additionally, an interest-only loan can be a smart move to alleviate the burden of paying down the principal amount, freeing up your cash flow to focus on maximising your investment returns.

Where can I find and compare Home Loans?

Comparing home loans online is the easiest way to search various lenders’ available home loan products. Online loan comparison tools allow you to compare multiple loan offers quickly and efficiently side by side. This saves considerable time and lets you enter specific financial details and preferences to find loans tailored to your circumstances and goals.

iSelect has partnered with Lendi to help you compare various providers in the market. Use our online tool to compare home loans.