When it comes to property investment, many first-timer investors find buying a house or unit most appealing.
After all, bricks and mortar investments are easier to understand than other investment options like shares.
However if you’re considering purchasing a second property, it’s essential to know how property investment works and whether it’s the right investment strategy for you.
Is an investment property right for me?
If you’re thinking of investing in a second property, the best piece of advice anyone can give you is to speak to your finance broker first.
Your broker can work with your accountant to assess your overall investment readiness based on your current income, debts, and expenses.
That way, you’re given a clear idea of whether you can afford an investment property and if it’s a suitable financial growth strategy.
Pros of buying an investment property
The pros of buying an investment property are many. However, the four main pro-investment advantages are:
- Market stability: property prices are less volatile than other investments, like fluctuating share market prices, for example.
- Revenue generation: tenanted properties can earn rental income.
- Capital growth: over time the property increases in value, thus providing capital gain.
- Tangible asset: offers peace of mind because the investment is a physical asset you can see.
Cons of buying an investment property
Of course, there are also downsides to investing in property. The main risks to consider are:
- Overextension: the rental income may not cover the mortgage repayments and other costs such as insurance, repairs and ongoing maintenance.
- Occupancy rates: should the property become vacant, you’ll need to cover the rental income shortfall.
- Interest rates: escalating interest rates may switch you from positive to negative gearing and diminish your disposable income, thus impacting your principal home and lifestyle.
- Liquidity: if you need access to cash fast, it can be challenging to sell an investment property if the market is slow.
- Depreciation: should property values decrease after purchase; you could end up owing more than the current market value.
While investing in property may seem like a good idea, it’s essential to carefully assess your financial situation and goals before making any decisions. And as with any investment property, there is no guarantee that you will make money on the sale.
Additionally, being a landlord comes with its challenges and responsibilities. The stress of dealing with difficult tenants or paying for unforeseen maintenance issues is the most publicised.
Should I borrow money to invest in property?
If you borrow money to invest, you’ll also need to consider the risks of that debt. Therefore, it’s essential to be realistic about your ability to repay the investment loan and other associated fees. The interest on borrowing for an investment property is usually tax deductible. With the help of your broker and accountant, it’s important to consider how this should be structured.
Taking out an interest-only mortgage to buy an investment property might seem attractive initially, but the downside needs careful consideration.
Firstly, you’ll need to rely on the property growing in value to create equity since you’re not reducing the principal. Next, should house prices drop after the purchase, you may end up paying more than the property is worth at the time of sale. Lastly, you must pay the principal sum owing eventually. And depending on the timing, that could present a significant financial burden.
Overall, there are many factors to consider when deciding whether to borrow money for investment property purposes. While an interest-only mortgage may seem attractive in the short term, it should only be considered in the right circumstances, and as part of a greater investment strategy. This includes putting the money you’re saving on repayments towards other debt (such as your home loan, which is typically non-deductible).
Should I invest in property?
So, should you invest in property? There’s no easy answer. Overall, property investment can be an excellent way to grow wealth and achieve financial stability. However, there are many risks and challenges, including house price volatility, interest rates, and return on investment.
Before deciding to buy an investment property, the smart move is to consult a finance broker. At Carbon, we help clients like you assess their investment readiness. Our finance team are aware of the overall health of the property market in Australia. This allows us to highlight potential risks and benefits involved before you make any decisions.
Whether you choose to borrow money or not, it is essential to be realistic about your ability to manage any additional financial obligations that come with property investment. Again, we can help you make that assessment.
Ultimately, the best property investment strategy fits your unique financial situation and enables you to achieve your financial goals.
Ready to dive in deeper?
Should you need further assistance determining your property investment readiness, our Finance & Lending team are at your disposal. Just give us a call on 1300 454 174 or fill out the contact form below.