An investment property has the potential to increase in value over time and it may provide an additional source of income once the property is paid off.
There are a number of ways you can invest in property. For example, you can invest directly as an individual, or through a self-managed super fund (if you have one), but like with most things, there will be risks to consider.
Here are some of the benefits and some of the things you’ll want to keep in mind.
If you’re renting out your investment property, you’ll be getting money from someone else to contribute to your home loan, which means you could pay off your mortgage sooner.
Bear in mind however that the rent you receive may not completely cover your home loan repayments and additional costs.
Many of the costs associated with an investment property are often tax deductible. For instance, the interest and fees you pay on your loan, advertising for tenants, as well as cleaning, gardening, maintenance and pest control.
Also, if your property is negatively geared—which simply means the interest, and other costs you incur are more than the income your investment property produces—the loss can reduce the amount of tax you pay on your earnings at tax time.
The reason the equity in your property can be a valuable resource is that it may allow you to secure finance to achieve other goals, whether they be investment or lifestyle oriented.
To break it down, home equity refers to the current market value of your home—which won’t necessarily be the price you purchased it for—minus the amount still owing on your home loan.
Remember though, as the market value of your property can go up or down, so too can the equity you have in it rise and fall. And, just because you have home equity doesn't mean you can automatically borrow against it, as your lender will look at factors such as your age, income, and other existing debts.
Things to be mindful of
Lenders will generally ask for a minimum deposit of 10% to 20% of the full purchase price, so unless you have the money to pay for the property outright, you’ll need to factor in what you can afford to borrow.
On top of that, there will be added costs—stamp duty, conveyancing fees, body corporate fees (for example, if the property’s an apartment), landlord insurance, maintenance, and interest on borrowings.
Your financial obligations might also increase if you don’t have tenants for a period of time.
Where you to decide to buy could impact the money you make in both the short and long term, which is why when you do your research it’s important to look into things such as what properties are selling for in the suburbs you’re looking at and what average rental returns and vacancy rates are like.
If you’re time poor or located a long distance from your investment property, another thing you’ll need to think about is appointing a property manager. Note, this will come at a cost of approximately 7% to 10% of your total rental income each week1.
There are various responsibilities that apply to landlords before, during and when ending a tenancy and these can differ depending on which state in Australia the investment property is located, so check out the appropriate state government or Fair Trading website where your property is based.
If you sell your investment property down the track and make a profit, capital gains tax may be payable.
While property values can increase, it’s important to keep in mind that property values may also decrease, which could see you breakeven or even incur a loss depending on how long you hold on to the property for.
Remember, property prices can go through major swings that can occur with little warning and if you buy and sell over a short timeframe you may be just as likely to catch a downturn as you are a boom.
Investors are not limited to residential properties such as apartments and houses―they can also invest in commercial properties such as an individual shop, shopping centres and office blocks either directly or through managed funds and property investment trusts.
Visit the AMP Capital website for more information about investing in property through managed funds.
For further assistance, regarding the advantages and disadvantages of property investment, speak to your financial adviser. And, if you don’t have one, contact AMP on 131 267 or use our find an adviser tool to locate a professional in your area.
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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.