Getting a return on your investment
Historically, property has always increased in value. While there may be dips and plateaus, if you’re in it for the long-term, property is generally considered a pretty safe option. Not only do you have the potential capital growth to look forward to, you can also get a steady stream of rental income from the moment you rent the place out.
The thing is, strong capital growth doesn’t often come hand in hand with high rental returns, and vice versa. That’s because the more expensive the property, the less the return tends to be. The properties most likely to have strong capital growth are in sought after, but pricey, inner city and beachside areas. While properties with a higher rental return are generally found in the cheaper regional and suburban areas.
For example: a 2 bedroom inner city unit might cost $650,000 to buy, but attract a rent of around $550 per week – a return of about 4% a year. While a 2 bedroom unit in the suburbs might cost only $300,000 but will get tenants paying $400 per week – a yearly return of around 6.5%. So you should decide on your investment strategy before you even start searching for a property.
A capital growth strategy
Capital growth can give you the big wins in the long term. Some property investors have doubled their money after only a few years of ownership. At the same time other investors have over-extended themselves and been forced to sell at a loss. Nothing is a sure thing. Do the sums carefully. If you have high loan repayments you may see little return or even a loss for a few years. For some investors this is not a problem because they count on:
- The short term losses being greatly exceeded by the long term gains.
- The tax relief that comes with negative gearing.
Negative gearing is when the annual cost of your investment is more than your return. The Government offers you some tax breaks when this happens. To find out more go to Tax and your investment property.
A rental income strategy
Opting for a strong steady stream of rental income doesn’t mean forgoing capital gains altogether – it just means your profit when you sell might not be as great as it might be for a different type of property. A rental income strategy can work well if you don’t have to borrow heavily and keep your repayments low. It’s sometimes called positive gearing – so unlike negative gearing you won’t “lose” each week after paying all the outgoings.
Again you need to do the sums when deciding on your property and the price you’ll pay for it. The experts talk about the property’s “yield” as a measure of its return. Very simply it’s the percentage of the annual rent a property generates calculated against its purchase price. To best work-out your actual return, you need to calculate the money in your bank account after all costs and taxes are sorted.
When deciding your investment strategy and what you can afford to spend, you should also consider the potential costs of ownership:
- Interest repayments – if you get a variable loan, factor in higher repayments if rates go up.
- Council rates and strata fees – the agent will tell you what these are per quarter but if you’re buying an apartment get a strata search so you’ll know if there are any big special levies in the pipeline.
- Repairs – if it’s a house you’ll be up for all the building repairs, but even in a strata block you’ll be responsible for repairs to fixtures and fittings and any whitegoods and appliances you include with the flat.
- Management fees – if you have the time and the inclination you can manage the property yourself, but if you get a managing agent count on paying around 5% of the rent.
- Insurance costs – if you purchase a house you’ll have to pay building insurance. It’s also a good idea to get landlords insurance which covers: Any damage done by a tenant, Your legal liability if a tenant injures themself and Lost rental income if your tenant moves out without paying.
When doing the sums, factor in rent-free/tenant-free periods. The experts say at least 4 weeks a year is a good rule of thumb.
Consider the risks
Like with any investment there is no guarantee that you will get a return. Property prices can drop and good tenants can be hard to find. Do as much research as you can before deciding if property is the best place for your savings.