The pros and cons of buying an investment property

By Mark Rosanes

Many investors consider real estate as an attractive investment option because of the potential benefits the market can provide. If done right, investing in property can be an effective way to build wealth and secure your financial future. However, careful planning and unyielding commitment are also needed to succeed in this kind of financial endeavour.

If you are planning to buy an investment property, there are several factors you need to consider.

Is investing in property worth it?

Just like any investment, real estate has its own share of benefits and drawbacks. Let’s look at them one-by-one.

Why you should invest in property

1. Security and stability

All people need a place to live. That is why properties are almost always on demand. The housing market may have its ups and downs, but it tends to be less impacted by market shifts and more likely to yield fixed returns even in the current economic climate.

2. Positive cash flow

You can use your real estate investment as a rental property to generate a steady flow of passive income, especially if the income coming in is more than the monthly repayments and maintenance costs combined. You can also use your rental income to pay off the mortgage and other expenses of the rental property.

3. Access to tax benefits

Residential rental property owners also enjoy a bevy of tax deductions that allow them to maximise their return of investments.

4. Long-term investment

Over time, the value of your investment property may go up, along with your rental income, especially if the property is in a high-yield area. This means your cash flow can also improve, leading to positive cash flow, which you can use to expand your investment portfolio.

Drawbacks to investing in property

1. Lack of liquidity

Unlike stocks, it takes a longer time to sell a property. This can put you at a disadvantage, especially if you need quick access to cash.

2. High entry cost

One of the biggest hurdles hindering many Australians in investing in property is the heavy financing involved. A deposit alone can cost tens to hundreds of thousands of dollars.

3. Ongoing costs

Investing in property requires ample planning and preparation because of the several costs involved. Mortgage repayments, council rates, maintenance and renovations expenses, and insurance are just some of the ongoing costs of owning a property. Because of this, it pays to have an investment strategy where the income from your property outweighs all ongoing expenses.

4. Bad tenants

Dealing with bad tenants can be a nightmare for landlords. Not only do bad tenants cause emotional stress, but their actions can also result in financial losses, especially if they regularly fail to pay rent or cause damage to the property.

What makes a good investment property?

Experts say that a good property can either make or break an investor. This is the reason why careful planning and due diligence are crucial when searching for the ideal one. Here are the things you need to consider when searching for the right investment property.

1. Location

A property’s location has a major impact on the rental demand, tenant quality, and rate of return. If the property is in a high-growth market, rental price, tenant quality, and the property’s value will likewise increase. Some good indicators of a high-growth area include a large and rising population, proximity to public amenities, vibrant job market, low crime rate, accessibility of public transportation, favourable taxes, and affordable insurance rates.

2. Condition of the property

When selecting a property to invest in, it is advisable to conduct a thorough home inspection to know if the property is in a sturdy condition and tenant-ready, as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.

3. Number of listings and vacancies

An area with a low number of listings and vacancies shows a strong rental market. Low vacancy rates also allow landlords to raise rental prices to boost returns.

4. Positive cash flow

An investment property should be able to generate a strong positive cash flow every month. This means the income a property generates is more than enough to cover everything that an investor puts into it.

5. Potential for capital growth

Apart from cash flow, investors should be able to generate profit from the property. The most common metric used to determine profit is cash on return because it factors in how the investment property is being financed. Experts say a good investment property can make cash on return of about 8% or more.

Best suburbs for investment properties

Some experts say that the key to finding high-yield investment properties is to look for suburbs that have both affordable property prices and relatively high rental returns. Typically, these areas located outside major capital cities, which often have expensive housing and lower yields.

Click here to see the top suburbs in the country based on rental yield according to the property market intelligence website.

Skybridge Capital is an MFAA accredited finance broker with expertise in commercial finance committed to the highest industry standards. Contact us for more information now!