With rising property prices in many parts of Australia, more and more people are considering investing in real estate as a way to grow their wealth. However, diving into property investment comes with both potential benefits and risks that you need to weigh carefully before taking the plunge. As a rental property owner myself, I’ve walked this path and understand the many key factors that should be considered by people in order to make an informed decision about whether property investment is the right path to achieving their financial goals.
The Benefits That Come With Property Investment
One of the main appeals of investing in real estate is the potential for your property value to increase over time, especially if you purchase in a high-growth area. Any appreciation in value allows you to build equity as your debt is paid down while the market value goes up.
Another benefit is earning an additional income stream through renting out your investment property. A good rental yield can boost your ability to secure financing and provide relatively stable passive income. With savvy property management, rental income can offset your expenses and supplement your cash flow.
Investing in property also allows you to leverage the bank’s money through your mortgage to purchase a more valuable asset than you could afford to buy outright. If the market value rises, you get to magnify your returns through this leverage.
Additionally, property investors can claim various tax deductions, including mortgage interest, repairs and maintenance, insurance, agent fees, depreciation and other expenditures associated with the property. You might also be able to offset some capital gains tax when you eventually sell, but this is a discussion for you to have with your accountant.
Finally, an aspect that appeals to many property investors is about having a tangible asset. You have more control over a real estate asset compared to some other investment types like shares, as it’s possible to add value through renovations, maintenance and effective property management.
The Potential Risks of Property Investment
While property investment offers enticing benefits, there are also hazards to be cautious of. One major downside is the lack of liquidity. Property is not as easily converted to cash as other assets because, depending on the state of the market, it may take weeks or months to sell a property when needed.
Owning investment real estate also comes with ongoing costs like council rates, strata fees, regular maintenance and insurance. Periods of vacancy between tenants or disruptive renters can further put pressure on prospective income.
If interest rates rise, higher mortgage repayments could exceed your rental income, forcing you to cover the shortfall until you can raise the rent or sell, and this could mean selling at a loss in a market downturn.
Compared to diversified financial assets, concentrating your capital on one or two properties significantly limits the spread of risk. With all your eggs in the property basket, an unexpected event can have a larger impact on your position than if your resources were spread across multiple investments. And because many property markets are cyclical, experiencing booms and busts, buying at the market peak could mean purchasing a property that stalls in value or even falls down the track.
Finally, it’s important to be aware of the potential difficulties with tenants. From rent arrears to damaged property, problematic tenants can cause significant headaches and legal issues that come at a cost. For this reason, rigorous screening is a must.
The Importance of Seeking Professional Advice
The ins and outs of property investment might seem challenging to get your head around, especially if you’re new to it, and it’s important to remember that there are both rewards and risks involved. Property investment has the potential for financial growth and stability, but it requires careful thought and consideration.
At Grow Financial Solutions, we’re finance professionals but also experienced property investors ourselves and understand the importance of thorough research and guidance. If you think investing in real estate could be a successful financial strategy for you, give us a call and let’s start the conversation.