March 3, 2014
We’re fans of property investment –given the right conditions – and the following is by no means intended as deterrent for property investment enthusiasts. But it is important to be aware of some of the pitfalls of investing in property as well as the benefits. To keep a balanced view, take a look below:
Be careful of the ‘returns hype’Over the years, Australia has experienced many news worthy property spikes. We’ve often heard people telling stories about how they bought a property low and five years later doubled their money. But it’s important to distinguish fiction from fact.
Sure, sometimes property values can double or increase significantly in less time than would be expected, but you need to also factor in costs like stamp duty, rates, improvement and maintenance, legal fees and agents fees. Tallying up all of those costs takes fair chunk out of the perceived profit, not to mention the time investment in managing tenants or agents etc.
If you’re planning on investing in property, typically you could expect around five to seven per cent return per annum – depending on the market, the property you buy and other factors.
Getting ahead with someone else paying the mortgageThe idea of owning an asset that will increase in value over time with someone else paying for it sounds pretty good. But in reality, in most cases, it simply doesn’t work out like that.
Rent in most cases needs to be topped up; tenants can come and go and even if the property is only empty for a couple of weeks, it can put a dent in your returns; agents need to be paid to manage the property or if you’re managing it yourself, you’ll need to spend on repairs and spend in terms of your time.
While you will be benefiting from someone else contributing to your costs, it is not always as easy as it might seem.
Property values do move on a regular basisOut-of-sight, out-of-mind: Just because we don’t see regular movements in the value of specific properties, doesn’t mean there isn’t any movement. We tend to think of property as a steady growth asset because it can be years between buying, getting a valuation and selling. On the other hand investment types like shares are valued on a daily basis meaning they appear more volatile over time.
The fact is, how much you’d get for your investment property would also change day by day depending on numerous factors like whether the right buyers are aware of the sale etc.
The important thing to keep in mind is that property is a long term strategy, which in most cases protects you from short-term price volatility.
The lure of tax advantagesProperty is often looked at as a good option because of tax advantages, like deductions on rates, maintenance and other costs. But the thing about deductions is they only come after spending money.
Property may have some unique tax advantages, but that’s simply because for this investment class you have to spend money to keep it. On the other hand, a share portfolio does not have the same tax breaks because holding a portfolio does not require the same investment to hold on to the asset.
Property is a long loved investment option for Australians and one that can offer financial security and freedom. But like all investment types, it is essential you go into it with your eyes wide open to the benefits and the issues.