What are the residential property investment alternatives?
The most popular form of investment in property among Australians and New Zealanders has clearly been residential property — flats, townhouses and houses. It’s one of several property investment alternatives. Others include offices, commercial property (like factories) and retail property. Investors who can’t afford to buy their own office block can also choose from various property trusts that invest on behalf of many people. Several of these trusts are available to investors through the Australian Stock Exchange and the NZX Equity Market. And all have different financial profiles.
Different sorts of property often produce similar returns. But while most prospective property investors have undertaken their own home financing and can transfer this experience to similar housing, it is unwise to believe that other property investments have similar characteristics. If you are venturing outside housing for the first time for investment purposes, make sure that you understand the details of the new market and obtain expert advice, if necessary.
Property management
Most property owners handle their property management through a real estate office. Most real estate offices provide an excellent service by marketing for tenants, arranging for rent to be collected, fixing minor repairs and providing a useful summary for tax purposes at the end of the year — but they usually charge between five and 10 per cent of the annual rent for this service. If you have the time to undertake these services yourself, then this can increase your return. But the call upon you, at possibly extremely inconvenient times, can be a heavy cost. In particular, if your tenants are turning over frequently (or are likely to do so), or if your particular segment of the rental market is prone to unusual competitive pressures (good and bad), the commission spent on an agent might be a sound investment.
Initial costs
* Stamp duty. This will usually be the biggest additional cost of acquiring a property — often up to six per cent. Remember to allow for this expense when determining how much you can afford. Stamp duty is a capital cost and is added to the cost base of the property.
* Legal/conveyancing fees. These are normally deductible if the property is for investment purposes.
Ongoing costs
Property as an investment has many benefits but it can be an expensive asset to hold. When calculating the return (and do make sure that you calculate it), ensure that you allow for the following charges:
* Interest costs on the borrowings.
* Insurance (be aware that items you provide such as drapes, carpets and appliances are contents and will need to be insured).
* Rates. Most residential tenancies do not allow for the payment of rates and other government taxes; therefore they need to be paid by the property owner. (This usually does not apply to other forms of property investments.)
* Repairs. Be realistic. Things do go wrong and need to be repaired or replaced. Maintenance items are usually tax-deductible — but be aware that property improvements are deemed to be capital expenditure and are added to the cost base of your property and are, therefore, not fully tax-deductible.
* Owners Corporation. These fees are payable in most unit and apartment complexes. The level of these fees can sometimes be quite high, particularly if there are large or expensive-to-maintain common areas such as gardens or pools.
The above costs are indicative of the types of expenses you will incur — but there may be others.
Gearing
Successive governments have helped investors to put together an investment portfolio by offering a range of valuable, tax-driven benefits. Most costs associated with investment property are allowable tax deductions. Where the rental income does not fully cover the expenses, then this is referred to as negative gearing.
Treat negative gearing with care. You make money only when the net capital value of the property increases by more than the net negative outgoings. This is fine in a buoyant market, but can be disastrous in a down market. If uncertain, seek advice. And do not forget capital gains tax — the tax on the increase in the value of your property between when you bought it and when you sold it.
Your investment, not your home
Finally, and most importantly, remember that property investment is fundamentally that — an investment. Far too many people are seduced into believing that their wonderful investment will eventually become a “second home” and select a house accordingly. Often, they can do better by investing in another area or even type of property, eventually realising an investment gain and doing far better than they would from a purchase driven by emotions.
Likewise, be careful of property investment seminars — especially those for purchases off a plan. Investment advisors who provide advice on the full range of your investment needs are strictly and closely licensed by official organisations.