What Are the Benefits of Investing in Property?

Many Australians are eager to enter the property market to secure strong returns. According to the Australian Bureau of Statistics, investors committed $6.64 billion in new loans in January 2021. That’s a 9.4% increase from the previous month—the largest rise since September 2016—and a 22.7% jump year-on-year.

So, why is property investment so appealing? Let’s explore the key benefits.

Passive Income Potential

Property investment can generate passive income. Unlike a traditional 9–5 job, passive income requires less ongoing effort. If rental payments exceed ownership costs, the property becomes positively geared.

For example, earning $3,000 in monthly rent while spending $2,300 on expenses leaves you with $700 in passive income. Over time, you may also benefit from capital growth as the property’s value increases.

You can access equity by selling the property, using a redraw facility, or refinancing your mortgage. Keep in mind that refinancing may increase your long-term costs due to higher interest on a larger loan.

Tax Benefits Through Negative Gearing

In Australia, property investors can claim tax benefits when expenses exceed rental income. If you incur a net rental loss, you can offset it against other income—like your salary or investment returns. This strategy may reduce your taxable income and lower your tax bill.

Asset Growth and Portfolio Diversification

Adding property to your investment portfolio can increase your total assets. If you already own stocks, crypto, bonds, or art, property offers another avenue for returns. A well-chosen property can generate cash flow or deliver profits upon sale.

Diversifying your investments helps spread risk and improve your chances of building long-term wealth. Conducting thorough market research before buying can lead to a strong return on investment.

RATEBUSTER TIP: Speak with a tax accountant to see if negative gearing suits your financial goals.

What Are the Risks of Investing in Property?

Like any investment, property comes with risks. Understanding these challenges can help you make informed decisions.

Market Fluctuations

Property markets don’t always rise. Even in strong periods, prices can stall or decline. While real estate is generally stable over time, there’s no guarantee of profit when you sell.

Short-term rentals like Airbnb also face seasonal and economic shifts. These factors can affect occupancy rates and reduce profitability.

Interest Rate Changes

The Reserve Bank of Australia (RBA) influences home loan rates. When the RBA raises the cash rate, lenders often increase variable loan rates. This can add hundreds to your monthly repayments and tens of thousands over the life of the loan.

Although the RBA may hold rates steady for now, future increases are likely.

Tenant Risks

Rental income isn’t always consistent. Market downturns or unreliable tenants can lead to vacancies lasting weeks or months. Damage caused by tenants may also require expensive repairs.

Before buying, research vacancy rates in the area to gauge rental stability.

Maintenance and Repairs

Older properties often need more upkeep. Landlords must fix major issues like broken appliances or damage from wear and tear. Tenants are responsible for cleanliness, but not structural repairs.

These costs can add up and reduce your overall return.

Ongoing Expenses

Owning an investment property involves regular costs. These may include:

• Council rates

• Water rates

• Building insurance

• Body corporate fees

• Land tax

• Property management fees

You might claim tax deductions for some expenses, but you’ll still need to pay them upfront. If your property earns positive cash flow, you’ll also pay tax on rental income.

How do I choose the right investment property?

How to Select the Right Investment Property

Choosing an ideal investment property requires careful planning. Unlike buying a home to live in, this decision is driven by practical factors—not emotion. Location, rental demand, and growth potential play a key role. Here are some essential tips to guide your search.

Target Areas with Growth Potential

Real estate agents often highlight “up-and-coming suburbs” as prime investment zones. These areas typically show signs of future capital growth. Look for suburbs with:

• A rising population

• Strong local employment

• Easy access to public transport

• Planned infrastructure upgrades

Also, review rental yield trends across different suburbs. This helps you understand how the area is evolving and whether it’s likely to attract tenants.

Check Vacancy Rates

Vacancy rates reveal how competitive the rental market is. Focus on suburbs with low vacancy rates. These areas are more likely to offer consistent rental income. High vacancy rates may signal issues with the location and increase the risk of long periods without tenants.

Choose Low-Maintenance Properties

Properties that require frequent repairs can eat into your profits. Unless you plan to renovate and add value, consider a turnkey property instead. Homes with large gardens or swimming pools often come with higher upkeep costs. These features may appeal to tenants but could increase your expenses as a landlord.

Talk to Locals and Agents

If you’ve narrowed down a location, speak with residents and local agents. Locals often know things that aren’t listed online—like which streets to avoid or which developments are planned. Even a barista at a nearby café might share useful insights.

Reach out to multiple agents and let them know you’re comparing properties. When they realize they’re competing for your business, they may offer insider tips or better deals.

Think Long-Term

Don’t rely solely on past rental yields or current vacancy rates. Consider future developments that could impact the property’s value or appeal. Visit government and council websites to check for proposed infrastructure projects.

While tenants may tolerate nearby renovations, major developments—like a shopping centre next door—could make the property less attractive. Planning ahead helps you avoid surprises and choose a property with lasting value.

What to look for in an investor home loan

There are various factors that affect the total cost of the mortgage and subsequently the return on investment that one should consider when selecting an investor home loan.

For leading investment rates visit Ratebuster – ratebuster.com.au 

 

Should I aim to pay down my mortgage quickly?

Before being approved for a home loan, borrowers must meet eligibility criteria set by home loan lenders. This is done to reduce the risk of default by first home buyers.

When it comes to investment property mortgages, the advice on managing debt differs from the common advice given to everyday Australians. Some experts suggest that investors need not worry about making extra repayments on a mortgage if their rental income can cover it.

However, the decision to pay down the mortgage quickly or take a more relaxed approach should depend on the investor’s intentions with the investment property. If the property is intended to be sold in a short period, then the mortgage may not be a major concern. But if it is a long-term income-earning asset for retirement, then managing the home loan becomes more relevant. Let’s weigh the pros and cons of each approach.

• Benefits of paying off your mortgage quickly

As an investor with long-term goals for your investment property, prioritizing the attached mortgage can offer several significant advantages. For instance, if you have a hypothetical mortgage of $400,000 with a 2.8% interest rate (excluding fees), paying an extra $150 towards your monthly repayments could save you $26,507 in interest payments over the loan’s life, and reduce the mortgage duration by 4 years and 1 month.

Furthermore, with the likelihood of mortgage rate fluctuations over the extended repayment period, it’s reasonable to expect rates to rise in the next 25-30 years. By paying off your mortgage quickly, you can minimize the impact of interest rate hikes.

Once the mortgage is fully paid off, the rental payments from your investment property can generate a significantly higher passive income.

 

• Benefits of not rushing to pay mortgage.

If your intention is to flip a property, then your main objective is to maximize its value. At this point, additional mortgage repayments may not be a top priority. Therefore, it’s not uncommon for investors to choose interest-only repayments on their mortgage to reduce expenses.

However, if you’re not planning on selling the property soon, a “set and forget” approach to mortgage repayments may have advantages. If the property generates positive cash flow, then the rental income should be enough to cover the repayments and possibly even provide additional funds. You can then use this extra cash to invest in other opportunities.

One option is to put the funds in a high-interest savings account or a term deposit. Alternatively, you could reinvest the money into the property through renovations to add value and increase your potential capital gain. You may also consider investing the funds into other assets, such as stocks, bonds, or even another investment property.

It’s crucial to conduct thorough research and even seek advice from a broker to determine the best approach for your specific financial situation.

 

Should I consider short-term or long-term leasing?

Before approving a home loan, home loan lenders require borrowers to fulfil eligibility criteria. This measure is put in place to mitigate the risk of a first home buyer defaulting on the loan.

For even the most experienced investors, deciding between short-term and long-term rental can be a challenging task. With the recent surge in short-term rentals, especially in regional areas due to the impact of Covid-19 on overseas and interstate travel, property owners may find it appealing. However, longer lease agreements, ranging from 6 to 24 months, can offer property investors the much-needed financial stability.

Let us examine some advantages of each type of lease arrangement:

 

Pros of short-term leasing

• Greater flexibility. Short-term rentals provide property owners with a significant benefit: increased flexibility. This means that if owners desire to use the property for their own personal use, or for their friends and family, they can easily reserve the necessary time.

• Less tenant stress. In the event of problematic tenants, short-term rentals can be advantageous as property owners are not bound to them as they would be with longer leases, such as 6 or 12 months. Additionally, as the property will be cleaned and maintained after every stay, owners may be more likely to prevent urgent repairs or issues arising from prolonged damage.

• Secure payment. Short-term leasing platforms such as Airbnb offer a valuable benefit to property owners by providing upfront payment before the stay. This can be particularly advantageous for those who have experienced issues with tenants not paying rent on time.

• Greater profit. Short-term rentals have the potential to generate greater profits than long-term ones in certain cases. Guesty, a website for short-term rentals, has reported that this type of rental can result in approximately 30% higher profits than long-term rentals.

Pros of long-term leasing

• Security. Long-term rentals offer a significant benefit in terms of stability and security. By renting out your property for an extended period, you can depend on a consistent flow of rental income without being affected by seasonal changes in demand that short-term rentals face with travellers.

• Simplicity. Running a profitable short-term rental requires a certain level of hospitality and maintenance that may not appeal to all property owners. On the other hand, long-term rentals offer a more straightforward option with less need for ongoing management.

• Less upkeep. Under the law, tenants are obligated to maintain the same level of cleanliness as the property’s initial state when they entered the lease agreement. This means that unlike short-term rentals, you won’t have to handle routine cleaning and basic upkeep of the property yourself.

• Pay fewer bills. Long-term renters bear the responsibility of covering utility costs such as gas, water, and electricity bills. This is a notable distinction from short-term rentals where you would have to handle these recurring expenses.

What is Negative Gearing and how does it affect me?

When it comes to investing in property in Australia, you may frequently encounter the term “negative gearing.” Negative gearing refers to a scenario in which an investor’s rental income is insufficient to cover the property’s expenses, such as interest payments.

In Australia, this topic is particularly significant because investors can use the net rental loss to offset their income, whether from salary or other assets. As a result, they may be able to reduce their taxable income for the financial year(s) in which they experienced a net rental loss.

Investors do not intend to lose money on their property, but unforeseen circumstances such as emergency repairs, tenant vacancies, or higher expenses can result in a loss. Nonetheless, they may choose to negatively gear the property for the tax advantages mentioned above, as well as the expectation that any capital gain, which is the profit earned from selling the asset minus the cost of the asset, will offset the loss.

Although capital gain is not a certainty, current market conditions in the housing industry suggest that property investors may face a lower risk of loss than other investment alternatives, based on CoreLogic data from 2020. Even with the disruptions caused by Covid-19, the value of capital city dwellings increased at the end of the year, depending on various factors such as location and market fluctuations.

To learn more about how tax applies to investment properties, please visit the Australian Taxation Office (ATO).

How can I avoid choosing a “lemon” as an investment?

Before applying for your first home loan or making an offer on a property, it’s essential to consider some critical factors. First-time homebuyers often make mistakes, but you can avoid them by being mindful of the following:

Like any asset, off-the-plan properties or new buildings have risks of fraud, scamming, or negligence from developers. Over the past few years, several developers, including Sydney’s Opal and Mascot towers, have been ordered to fix severe construction faults and damages. Unfortunately, it’s challenging to determine if a new apartment block has issues before making an offer, and major defects may only surface years later. Trusting the professionalism of builders, engineers, and certifiers always involves a level of risk, so you must do your due diligence before investing in a property.

If you’re interested in investing in off-the-plan properties or new buildings in New South Wales, you should know that a new Building Commissioner has been appointed to raise standards in the state’s construction industry, which has had a “major impact” on the standard of projects. This should result in a more reliable environment with reduced risk of negligence.

If you’re considering investing in an existing dwelling, you can reduce potential risk by ordering your inspections, even if the current owner has paid for a professional inspection. Hire an independent professional to inspect the property for damages, faults, and pests, and don’t rely solely on recommendations from the current owner. An independent investigation can provide you with a thorough assessment of the property’s existing issues. While minor faults may be fixable, major ones can significantly influence the property’s value and your decision to purchase it. As an investor, you don’t want to run into unexpected problems or sink tens of thousands of dollars into a property.

 

Investing FAQs

Why should I invest in property?

The colloquial expression “safe as houses” is rooted in the fact that property is generally viewed as a less risky investment compared to other high-risk options such as stocks, bonds, and even cryptocurrency.

How much deposit do I need for an investment property in Australia?

It is commonly advised to save a minimum of 20% deposit before seeking a home loan, in order to avoid incurring expensive lender’s mortgage insurance. Although deposits of 10% may be accepted, additional expenses may be incurred.

What type of investment property should I buy?

The decision of selecting your initial investment property is a deeply personal one, which will vary for each individual in Australia and should be given due consideration. It is advisable to assess all options, such as comparing the cost-effectiveness of apartments versus houses, and the difference between strata fees and council rates. Prior to making a decision, it is important to conduct thorough research on the suburb, the surrounding neighbourhood, vacancy rates, and rental yield growth.

Can I get a mortgage based on rental income?

In general, lenders evaluate your borrowing capacity by considering various income sources, including 80% of your rental income, as well as your salary and other assets.

I’m from overseas, can invest property in Australia?

Foreign buyers who wish to invest in Australian real estate must adhere to specific rules and regulations. They are permitted to invest only in new dwellings, off-the-plan properties that are under construction, or vacant land that is intended for development.

In addition, foreign buyers must obtain approval for their investment from the Foreign Investment Review Board (FIRB). The fees associated with the FIRB application are determined based on the property’s value and are payable in addition to the purchase price.

Do I need a larger deposit for an investment property?

In most cases, having a larger deposit or demonstrating higher savings may not be necessary when applying for a loan. However, as investors may face more stringent eligibility criteria, it may be beneficial to have a larger deposit or show a greater level of savings to increase the likelihood of obtaining an investment loan.

Are there extra fees involved with investing?

Investing in property may entail extra expenses, such as property management fees, landlord’s insurance, accountant fees, and the cost of obtaining a depreciation schedule to determine potential tax deductions for your investment.

What are the tax benefits for property investing in Australia?

Property investing provides various tax advantages, including negative gearing, depreciation, exemptions from capital gains tax, the ability to claim mortgage interest as a tax-deductible expense, and exemption from taxes on funds withdrawn through an equity loan.