Investing in property

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The most popular form of property investment in Australia is in residential property.

Other investment alternatives include office space, commercial property and retail property – and indirectly through managed investments such as property trusts and other investment packages that have a property portion.

All investment properties require essential management to protect the value of the asset and the returns (rent) from the property. The easiest, and safest, method is through real estate agents who provide a range of services including letting, rent collection, maintenance and itemized income versus expenditure details for tax purposes.

When buying an investment property the capital costs, initial costs and ongoing costs all need to be considered in the business sense: is the product (the property) marketable at the price (rent) that will provide an adequate return on the investment? Are the startup costs (Stamp Duty, Legal/Conveyancing etc), maintenance and other ongoing costs going to eat away at returns to the extent that the investment is not viable?

Ongoing costs that need to be considered:
– Interest on borrowings.
– Insurance (building and contents)
– Rates (if paid by the owner.)
– Maintenance (planned and unscheduled).
– Body corporate, which can be substantial if there are extensive public areas to maintain (swimming pool, lift, gardens, tennis court, etc) – and there may be unexpected arisings such as unplanned repairs and maintenance.

In Australia there are tax concessions available to property investors, with a range of income producing costs accepted by the ATO as deductions – to the extent that deductions that exceed revenue on one property may be transferred to other income-producing investments. When rental income does not fully cover the expenses, this is referred to as Negative Gearing.

The advice is to treat Negative Gearing carefully. The golden rule is that you reduce tax through ‘gearing’ only when the net capital value of the property increases by much more than the net negative outgoings. This works well in a buoyant market but can be disastrous in a down market, and as property is typically a long term investment then the Negative Gearing aspect needs critical examination.

Then there’s Capital Gains tax to consider, which is applied to the assessed value of your property between when you bought it and when you sold it – after discounting for indexation. This is an area where expertise is important, and novice investors are urged to seek professional advice on ‘gearing’ and ‘capital gains’.

When selecting a property for investment purposes sentiment needs to be set aside, replaced with clear business thinking.

A property that is relatively low in capital purchase price, has low ongoing costs, commands good rent levels and has good potential for increasing capital value is obviously the best choice over one with high capital cost and high outgoings.

If too much is paid for the property (over capitalization) with low potential to increase in value then it’s probably not a good investment, especially if it has high maintenance costs.

Other investments to treat with suspicion are properties linked to investment seminars, Internet marketing schemes – and especially purchases off a plan, which can be highly speculative.

One aspect of investing in property is that it is a form of forced saving on an asset that over time will increase in capital value – sometimes markedly, sometimes marginally, and it has to be said, sometimes negatively. If treated as a long-term investment that commits funds to an asset that appreciates rather than something that depreciates in value, such as an expensive motor vehicle, then investing in property can provide rewards later in life when it is really needed.

There’s no doubt that people who invest in property wisely and not indulge speculatively will increase their asset value.

Note: Investors in property have made a range of returns in the long term but in recent years the capital appreciation has slowed, and while there has been a recent upturn in demand the returns of the 70s and 80s are not back. Nevertheless, investing in ‘bricks and mortar’ remains popular because it is a tangible asset that is unlikely to go down in value over the longer term.

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