Thinking about buying an investment property? You’re not alone. Property investment is one of the most popular ways to build wealth in Australia. With the right approach, you can unlock capital growth, earn rental income, and access tax benefits you won’t receive from any other asset class. Whether you’re a novice or a seasoned investor, this guide is packed with valuable tips and strategies to help you build wealth through property.
Understanding Property Investment
Property investment sounds confusing at first. But once you break it down, it becomes easier to understand. Basically, property investment involves purchasing real estate to generate income, either by renting it out or selling it at a higher price in the future. Unlike other investment forms, property offers the dual advantage of capital growth and rental yield, making it a unique and attractive option.
- Capital Growth
Property prices in Australia have consistently risen over the long term. The average percentage increase in the asking price for homes in Sydney, Melbourne and Brisbane over the last 10 years has been 6.2%, 6.2%, and 7.2% per annum, respectively. To give you an idea, a 7% average annual increase means your property would double in value within 10 years. - Rental Income
Investment properties can generate a steady rental income to cover mortgage repayments and other expenses. High rental yield investment properties are great because they give you consistent cash flow. Some investors even earn enough money from rent to quit their jobs and replace their 9-5 income. - Tax Advantages
Investing in real estate also offers several tax benefits that other asset classes don’t. Expenses such as mortgage interest, property management fees, council rates, insurance, and maintenance costs may be claimed as tax deductions. Plus, depreciation on the building and certain fixtures can also be written off, helping you build wealth even faster. - Less Volatility
Property may be right for you if you don’t want your investment’s value going up and down like a yo-yo. Property prices can be less volatile than assets such as stocks, cryptocurrencies, and commodities. Real estate values’ gradual and predictable growth makes property an attractive proposition for risk-averse investors, such as retirees or those nearing retirement, or new investors looking for a safer entry into the investment world. - Tangible Asset
Unlike stocks or bonds, property is an investment you can see, touch and use. This tangibility provides a sense of security. It also gives you physical ways to improve the performance of your investment, such as renovating to increase the market value or rental yield of physical asset. - Leverage
Ever heard the phrase, “You need money to make money?” That’s what leverage is all about. Leverage lets you control a substantial asset with a relatively small initial investment. To give you an idea of the power of leverage, look at the following hypothetical examples.
Scenario One: You buy a house worth $500,000 with an initial 20% deposit of $100,000. The house price goes up 10%. You have a capital gain of $50,000 (10% of capital gains over the initial $500,000 house price).
Scenario Two: You put the $100,000 into the share market. Your shares go up by 10%. Your capital gain is $10,000, $40,000 less than scenario one.
Of course, there are many other factors to consider, such as the cost of owning and selling an investment property. However, this example highlights the benefit of using leverage to accelerate wealth by controlling a larger asset.
Key Factors to Consider When Buying Investment Property
Property can be a simpler investment to understand than shares, trusts, or investment bonds. However, there are still several factors to consider when finding a profitable property.
Property Type
Choosing the right type of property—a house, apartment, or commercial space—is essential. Each type has its own set of advantages and potential drawbacks. For instance, houses typically offer greater capital growth, while apartments may provide better rental yields.
Not sure which property type is right for you? Check out our guide to understand the different property investment strategies you can follow.
Market Research
Thorough research is crucial. You don’t need a PhD in real estate, but you should understand the current property market trends, economic outlook, and demographic information. Websites like CoreLogic, MoneySmart, and Westpac provide detailed market analyses and insights. You can also enlist the help of a buyer’s agent to research for you.
Property Location
Even if you’re a beginner, you’ve probably heard the saying, “location, location, location.” Location is a significant determinant of a property’s value and rental income, and it’s easy to see why – most people prefer to live in a major city like Sydney, Melbourne, or Brisbane instead of the middle of nowhere. Properties in prime locations often yield higher rents and may appreciate faster. Assess the growth potential of suburbs and consider proximity to amenities, schools, and public transport.
Financial Considerations
It’s important to factor in costs when calculating potential trial returns from property investment. These various cost can be divided into upfront costs and ongoing costs.
Upfront property investment costs include:
- Deposit
- Stamp duty (or transfer duty)
- Legal fees
- Loan application fees
- Lender’s Mortgage Insurance (LMI)
Ongoing property investment costs include:
- Mortgage repayments
- Property management fees
- Council rates
- Insurance
- Repairs and maintenance
- Body corporate or strata fees
- Tax on rental income
- Utilities (although tenants typically cover these)
Expert tip: Tools like our mortgage calculators can help you understand your loan costs, borrowing capacity, and repayment schedule.
3 Potential Risks and How to Mitigate Them
Investing in property offers you a golden opportunity to build wealth, but it’s not without risk. Understanding how to address these potential challenges can help you avoid costly mistakes most new investors make.
- Market Fluctuations
The property market is subject to fluctuations influenced by economic conditions, interest rates, and government policies. Property markets operate on a cycle and go through different phases, including boom, slowdown, downturn, and recovery. Given that different markets within Australia have their economic conditions, they may be in alternating phases of their cycle. For example, the Perth market could be booming while Melbourne is in a downturn (and vice versa). Staying informed and adapting your investment strategy to the market conditions can mitigate your risks. - Vacancy Periods
Vacancy periods between leases, where your investment property remains unoccupied, can impact your rental income. To minimise this risk, you should consider properties in high-demand areas and maintain the property in good condition to attract and retain tenants.
Currently, vacancy rates are at record lows right across Australia. In June 2024, vacancy rates for Sydney, Melbourne and Brisbane rentals were 1.2%, 1.2%, and 0.9%, respectively. Low vacancy rates create ideal conditions for property investors because the increased tenant demand gives you a better chance of securing tenants quickly and maintaining a steady rental income.
- Maintenance and Management
Ongoing maintenance and property management fees can add up, but it’s not just the costs you must consider when investing in real estate. Managing a rental property or investing in property development can also take significant time and research. You may view property investment as a hands-off way to earn passive income and escape your day job, but without expert help, you can spend several days a week managing your investment. Engaging reliable property managers, buyer’s agents, mortgage brokers, accountants, and conveyancers can make your property investing journey faster and easier.
How to get Started Investing in Property: Follow these 4 Simple Steps to Success
While investing in property may seem intimidating, it helps to follow a proven process. These 4 simple steps give you a roadmap to success.
- Set Clear Investment Goals
Determine your investment goals – whether it’s for capital gain, growth, rental income, or both. Having clear objectives will guide your investment decisions and strategy. It will also help you stay focused and avoid impulsive decisions that might not align with your long-term plans. - Secure Financing
Assess your financial situation and secure financing. Consider factors like interest rates, loan terms, and repayment flexibility. Mortgage brokers can help you find the right loan for your situation and goals. To find the best mortgage broker in your city, check out our comprehensive list of the top 10 mortgage brokers:
- Choose the Right Property
In real estate, it’s often said you make money when you buy, not when you sell. The difference between owning a wealth-generation machine and a money pit is identifying the right property. Leverage the expertise of real estate professionals, including buyer’s agents and property managers, to find and purchase the right property. Conduct thorough due diligence, including property inspections and valuations. - Manage Your Investment
Effective property management is crucial for maximising returns. This includes maintaining the property, setting appropriate rental rates, and addressing tenant issues promptly. Professional property managers can be invaluable and take much of the heavy lifting off your shoulders.
Emerging Trends
Interest in property investment is booming in Australia. This popularity has created several emerging trends you need to be aware of, such as:
Technology (also known as ‘PropTech’)
PropTech has come a long way in recent years. Virtual open inspections make it easy for you to view properties in other states, while the evolution in banking technology has streamlined transactions and reduced costs for investors. Platforms like BrickX are also revolutionising property investment by allowing fractional ownership. This enables investors to buy property shares, making it easier to diversify your portfolio and access the property market with less money upfront.
Sustainable and Green Properties
There’s a growing demand for sustainable and energy-efficient properties among environmentalists and the broader population. Investing in green buildings benefits the environment and attracts tenants willing to pay a premium for eco-friendly living spaces.
Regional and Suburban Growth
With the rise of remote work since the pandemic, many Aussies have moved from city centres to regional and suburban areas. These areas often offer more affordable property prices and have shown significant growth potential, making them ideal for mum and dad investors.
Real-Life Examples and Case Studies
Are you starting to wonder what’s possible when investing in property? Let’s take a look at two examples:
Case Study 1: Investing in Sydney’s Property Market
John, a first-time property investor, purchased a two-bedroom apartment in Sydney’s Inner West. Despite a higher purchase price, the property’s location near public transport and amenities ensured high rental demand. Over five years, the property appreciated by 40%, and the rental income covered the mortgage and other expenses.
Case Study 2: Regional Investment in Queensland
Sarah invested in a house in a growing regional town in Queensland. The lower purchase price and higher rental yield made it an attractive option. The property’s value increased by 25% within three years, and the steady rental income provided a reliable cash flow.
Conclusion: Making the Most of Property Investment
Property investment in Australia offers incredible opportunities for building financial security and wealth. Whether you’re aiming to invest for capital growth, rental income, or a balanced investment portfolio, real estate remains a solid and rewarding investment choice. To ensure you make informed investment decisions and achieve your financial goals, conduct thorough research, understand market dynamics, and leverage professional expertise on your journey.
FAQs About Mortgage Pre-Approval
Property investment involves purchasing real estate to generate income or profit. The idea is to buy properties to either rent or sell at a higher price in the future. The rental income can cover mortgage repayments, maintenance costs, and other expenses while the property’s value appreciates over time, leading to capital gains. As an investor, you can benefit from tax deductions on mortgage interest, property and management costs and fees, and depreciation expenses.
To start property investing, follow these steps:
- Set clear goals: Determine whether you aim for capital growth, rental income, or both.
- Secure financing: Assess your financial situation, compare mortgage options, and get pre-approved for a loan.
- Choose the right property: Engage with real estate professionals and conduct due diligence.
- Manage your investment: Hire a property manager to handle day-to-day operations and maintenance.
An investment property can be a good idea in Australia due to the country’s stable property market, strong rental demand, and potential for capital growth. Investing in property can provide a reliable income stream and long-term financial security. However, it’s essential to understand the market dynamics, costs involved, and potential risks. Proper research and professional advice are crucial to making an informed decision.
There’s no guarantee you’ll make money if you buy an investment property. It depends on several factors: location, market conditions, and management. Properties in high-demand areas with strong rental yields and capital growth potential are more likely to be profitable.
Spread your risk by diversifying your portfolio with other investments. Monitor market trends and economic conditions and pick properties in high-demand areas to ensure a steady rental income. Hiring a reliable property manager can also help handle the daily operations and maintenance, giving you peace of mind.
As an investor for residential purposes, you can claim tax deductions for mortgage interest, property management fees, council rates, insurance, and maintenance costs. In addition, depreciation on the building and certain fixtures can also be written off.
Look for areas with strong growth potential, good infrastructure, and high rental demand: research demographic trends and future development plans for the region. Proximity to amenities, schools, and public transport can also increase the property’s value and attractiveness to tenants.
Ongoing costs include mortgage repayments, property management fees, and maintenance costs. Additionally, you’ll need to budget for insurance, council and water rates, and legal fees. These costs can add up, so factoring them into your financial planning is an important factor.
The best property type depends on your investment goals and risk tolerance. Houses often appreciate more over time, offering better capital growth, while apartments can provide higher rental yields. Commercial properties, including office spaces and retail units, can provide substantial returns but have higher risks and extended vacancy periods.
Investing in a property with $1,000 can be challenging due to the high upfront costs. However, options like Real Estate Investment Trusts (REITs) and property crowdfunding platforms may allow you to invest in real estate with smaller amounts of capital. These platforms pool funds from multiple investors to purchase properties, offering access to fractional ownership and proportional returns based on your investment.
A: In Australia, the typical deposit for an investment property is around 20% of the purchase price. This means if you’re buying a property for $500,000, you would need a deposit of $100,000. Some lenders may accept a lower deposit, but this often requires you to pay Lenders Mortgage Insurance (LMI). A solid financial plan and an understanding of the costs involved are essential, including stamp duty and legal fees.
