Buying An Investment Property: Pros and Cons
Buying an investment property (or five) is certainly a very popular activity in Australia. In fact, more Australians have become millionaires from the property investment class than any other type. So, if you are looking at buying an investment property, what are the pros and cons?
Let’s start with one of the pros; property can be a less volatile investment than say shares or other classes of investment. While the last few years have seen a tumultuous time for property, overall, the property market runs and cycles and if held onto for the long term, investors should realise capital growth on their property.
This leads into one of the cons of buying an investment property; when the property market does go down, so does your investment. There have been many instances (particularly during the property slump over the GFC) where people have ended up owing more than what their property is valued at, or negative equity. Not a comfortable situation to be in!
Our next pro for buying an investment property is that you can create wealth from your investment property in two different ways; you can collect rental income and you can realise capital gain on the property over time. You can even use the equity from capital gain to invest in further investment properties!
From the opposite perspective, if your rental sits vacant for any period of time, you will be shelling out expenses such as mortgage, insurance and rates while not receiving any rental income. You will have to use your regular income to cover these expenses. At the same time, unlike shares or bonds, you cannot sell off part of your investment property to cover expenses during down times.
As a positive however, if you take out lending to purchase an investment property you can claim tax deductions for the expense. Along with this there are a number of other expenses associated with your rental property that are tax deductible, such as administration costs, maintenance costs and the ability to claim back for negative gearing (where your expenses are greater than the income you are receiving from the property).
Of course, in terms of the lending on investment properties, entry and exit costs can be high and fluctuation in rates can affect your disposable income. However, banks can be quite competitive with one another so if you shop around you may be able to find one willing to discount costs or take a margin off the rate for you.
One of the great draw-cards to property for many people is the emotional aspect of the investment. It is solid, tangible, something that you can physically see and touch at any time. Essentially, owning land and physical assets will always have some kind of value for you; stocks can crash to negative values very quickly but your land will always be worth something.