The Highs and Lows of Investing in Property
For a long time, investing in property has been portrayed as a great way to build wealth. Whether it’s through huge capital gains from flipping houses or earning passive income by renting them out, in reality, there is much more to it than this.
Rental Income and Gearing
While it’s true that you can earn a good amount of money from having tenants occupy your house, the rent often does not cover the mortgage repayments. When your investment return is less than the costs, the investment is negatively geared. Though you’ll need to have another source of income to be capable of making the mortgage repayments, this is not necessarily a bad thing, in fact being negatively geared can have some great benefits. Generally, a tax deduction can be claimed for any investment loss incurred due to negative gearing and can be a terrific strategy to reduce taxable income.
Positive gearing is when the rental income is higher than the costs of the investment. You will be making money on your investment but this income is taxable. Investment properties can be used for tax-deductible purposes or to generate more income, depending on how they’re geared.
A risk that needs to be considered is the chance that the property could be left empty for some time if a suitable renter isn’t able to be found. While the investment loss is tax-deductible, you need to be prepared and equipped to be able to cover the cost out of your own pocket.
Capital growth
Although there are never any guarantees regarding investment returns, historically the property market steadily increases over the long term. This steady market incline means that most properties should experience capital growth which can offset the investment loss incurred in the early years from being negatively geared.
It is possible to maximise your capital growth by researching market trends. Properties in desirable locations with easy access to things such as quality schools, public transport, pools, beaches, nature reserves and any other popular facilities, tend to rise in value significantly. Household features such as off-street parking, multiple bathrooms and large bedrooms can see your property value rise well over time too. Renovations are also a great way to fast track your capital growth.
Volatility
Property is an attractive investment as it is known for being much less volatile than the share market and is also quite a liquid asset. With the property market steadily rising, houses can be sold quite easily if you require quick cash but unlike shares, you can’t just sell off a portion of the investment.
While the property market is historically very stable, it still experiences peaks and troughs. An interest rate rise is also not typically passed onto renters and as such, investment income will be lower. Of course, the reverse is also true; interest rate drops mean the investment income will be higher.
Property can be a very profitable part of your overall financial portfolio if managed well and tailored to suit your needs. Be sure to speak to a professional about diversifying your portfolio so you’re not overly invested in property for the purposes of risk management.
