Investing in property could allow you to build significant wealth and secure an income stream for the future, but it's not without risk. If you're thinking about investing in property, you'll want to understand the potential limitations and drawbacks as well as the potential advantages of property investment before you make any decisions. Here, we outline the top pros and cons of building wealth through property investing.
Potential advantages of an Investment Property
Property investing comes with a lot of potential advantages, both in the short and long term. This explains its popularity with investors.
1. Easier to understand
Investing in residential real estate could be easier for some than gaining confidence in investing in the sharemarket. You don't need special qualifications or expert knowledge to invest in property. It’s a bricks and mortar security and you can physically see and touch it.
As the saying goes, property investment could be as safe as houses. Well, like literally! Lol Property is often seen as a more secure option than alternatives, because it’s a tangible asset. Property is generally less unstable than options like shares, for example.
3. Income stream
As long as the property is tenanted- so someone lives there and pays you rent; you can generate an income from the rent. This can be used to cover mortgage repayments and other costs.
4. Capital growth
At the same time, your property could be passively generating wealth for you in the form of capital growth. Capital growth is where the property value goes up with time. You can tap into this equity by using it to finance another investment property, or when you sell the property and realise the capital gain or cash.
4. Tax benefits
You could offset your property expenses against your rental income. This includes the interest on the loan you used to buy the property and other property bills like water connection and council rates. In addition, you can take advantage of strategies like negative gearing to minimise your tax bill.
5. Leverage to buy
Because lenders are usually happy to use underlying property to secure the loan, you're leveraging a 5% or 10% deposit to own a property that's worth many times more than the money you put up.
You could buy your first investment property while renting yourself and get on the property ladder earlier than expected. This means you might be able to live in the suburb you prefer while building up equity (capital growth) in a property you own, one that's generating rental income at the same time.
Potential drawbacks of investing in property
As with any type of investment option, property investing can come with certain drawbacks and it’s important to factor these into your decisions.
Unlike investment alternatives like shares, buying and maintaining a property tends to cost more, ahem a LOT more! You'll need to pay one-off purchase costs as well as selling costs, if you eventually sell. Maintenance and repairs can also be expensive.
Along with stamp duty, legal costs and building reports, you'll need to factor in ongoing costs like mortgage repayments, council and water rates, insurance, land tax, property management fees, and body corporate fees. In addition, your rental income might not cover your mortgage repayments and other ongoing expenses and there might be a shortfall which you’ll need to pay out of pocket.
2. Dependence on tenants
If the property is vacant, you're not generating rental income. You might need to keep the property occupied for most of the time to cover a good amount of your ownership costs. In addition, nightmare tenants can lead to ongoing headaches, so you’ll also need to factor the cost of landlord insurance.
3. Illiquid investment
Property is considered an illiquid investment, which means you can't easily offload it to generate some cash flow in an emergency like you could with shares.You also can’t sell off part of the property, like ya know, the bathroom or the third bedroom if you need to access some cash fast! It can take weeks or months to sell your property and this selling period can be dependent on the seasons.
4. Hidden issues
You can have hidden issues come to light years after you've purchased the property even if you have all the right checks done on the property. Especially if there’s an issue you can’t see, hear or smell to know it exists!
5. Lack of diversification
Since property costs more to get into, some investors might have all their eggs in just the one basket instead of having a range of product options in their investment mix. Add to the scenario sudden changes like rental vacancies and changing interest rates and you could be subject to higher risk than you might be aware of.
Avoid the pitfalls
Investing in property is generally seen as a safer option than say, investing in the sharemarket, for good reason: the underlying asset could produce rental income as well as capital gains and it can also be fall back accommodation if ever needed too. You can take advantage of tax benefits while leveraging just 10% cash or so (deposit amount plus purchase costs) to buy into full ownership of an asset that could continue to generate wealth for you for the long term. The drawbacks, like costs, exposure to tenants, interest rates, and lack of diversity could be managed as long as you have a strategy for dealing with them.
Kudos Money is a family owned, Australian company and a leader in the mortgage brokerage space. Our multi-award-winning team of brokers has a wealth of knowledge and experience in helping you find the right loan for your needs, without the headache and big words. Contact us today for a discussion about your property investment loan needs, Paul and Sarah are available for all your questions.