Entering the world of property investment can feel daunting, especially if you don’t have a lot of investment experience in general.
Luckily, property is one of the safest types of investment, with capital growth over time almost a certainty.
In this guide, we explore the benefits of investing in property and also outline the process for getting started yourself.
It’s almost certain that your property will undergo capital growth over time, thereby increasing the value of your investment.
As well as capital growth, an investment property can also be used to generate regular rental income. If this is higher than the costs incurred in maintaining your investment property, collecting rent from tenants can become an effective ongoing source of revenue.
Compared to other avenues of investment, such as the stock market, property investment is generally considered the safest and least volatile.
There are a few reasons for this. First, you can immediately start generating returns on your investment through rental income. Second, the physical nature of a rental property makes it easier to effectively insure and also enables you to make specific changes to it to increase its value (e.g. renovations), allowing you more control over your returns.
Favourable tax implications
- Though an investment property does incur taxes, including income tax, capital gain tax, property tax and land tax, you can claim back a number of expenses associated with maintaining the property, thereby reducing your taxable income, including:
- Property management and real estate agent fees
- Repairs and maintenance
- Depreciation on fixtures and fittings
- Interest on your mortgage or investment loan
- Council and water rates
At the same time, if your rental income is less than the yearly costs generated by your investment, your property is considered to be ‘negatively geared’. Generally, this entitles you to offset the difference (i.e. the loss) against your total income for the year – not just the income generated from your rental property. This means that any losses generated from your investment property result in a commensurate reduction in your overall taxable income.
That being said, it is important to remember that expenses still need to be paid by the owner, so the decision to intentionally negatively gear a property should be subject to careful consideration.
When exploring purchase options, it’s important to adopt the tenant’s perspective in assessing any given property’s value and potential. An impossibly cheap property on the edge of town will likely generate a worse return over time than a more expensive property in a desirable area with access to attractive amenities.
Below is a list of property features that tenants tend to find attractive:
- Convenient location – easy access to schools, shopping centres, public transport and entertainment will be key for many prospective tenants
- Quality fixtures and appliances – from hassle-free utilities to the inclusion of appropriate airconditioning units and fans, tenants value reliability and comfort
- Suitable parking – many tenants will see access to (secure) parking as a non-negotiable, especially in locations where street parking may not be widely available (e.g. the CBD and other built-up areas)
- Outdoor living amenities – because of WA’s temperate weather and a lifestyle that places a premium on the great outdoors, tenants tend to be attracted to rentals that allow them to enjoy the sunny weather and the sea breeze, whether that be via a balcony, alfresco area or a courtyard
For a more in-depth analysis of how you can make your rental property more enticing to quality tenants, read through our prior blog post here.
Researching prospective suburbs
Apart from assessing the attractiveness of a suburb from the perspective of prospective tenants, you should also consider its growth potential. Though ongoing rental income is important, ideally the overall value of your investment will also increase as time goes by, which in turn should enable you to generate higher levels of rental income.
The ‘Suburb and regional profiles’ section of REIWA’s insights page is a simple resource you can use to assess the performance of a suburb over time, from trends in sales and rental growth to changes in median sales and rental prices.
Estimating return on investment
Also known as rental yield, the return on investment of your rental property is measured by calculating rental income as a percentage of the property’s overall value – the higher the percentage, the better the return.
Rental yields are generally calculated on an annual basis and can be presented in gross or net terms, with the latter also accounting for the expenses associated with maintaining the investment.
Assessing the potential rental yield of a property pre-purchase will involve some guesswork, estimation and research. If it is already a rental property, you may be able to find out its current rental price and use this to inform your calculation. Otherwise, we can help by doing an appraisal on the property and can come up with an approximate figure by looking at rental prices for comparable properties in similar areas.
Do you have a question about investing in property? Contact us today and we’d be happy to help you get started on your exciting property journey.