Advantages and Disadvantages of Property Investment
Buying a property and then converting it into an income-generating investment is a popular practice in Australia. Many see it as an easy way to get additional income since all you need to do is execute the ‘buy and hold’ strategy. That’s not necessarily the case, though. There are several factors you have to consider in buying a property.
Advantages of investing in a property
1) Sole management
You can do whatever you want with the property. Designs, plants, styles, colours – all these can be configured according to your preference. You also choose who to rent or sell your property to.
2) Reduced volatility
People see stocks as high-risk investments and it can bankrupt you if you’re not careful. This is one reason why people invest instead on properties as they’re less volatile compared to shares and similar options.
3) Added income
Renting your property is one of the best ways to earn from your investment. Subtracting the tax and maintenance costs, you’ll still get a decent amount of income without doing anything much.
Even if your mortgage costs $500 and maintenance will cost you another $200, you still have money to pocket if you rent your property for a thousand dollars.
4) Capital growth
Purchasing property in a developing location is a decision that can make you rich. Areas with high business traffic will surely generate more profit than a property in a rural area.
Newcastle, New Farm, Hobart, and Canberra are the hot places to invest in. Huge developments in the Sunshine Coast and the Gold Coast also signal a good time to buy properties in the area.
5) Tax deductions
Expenses on maintenance, counselling fees, and cost of hiring a managing agent can all be filed for tax deductions at the end of the year. Property value depreciation can also be considered in filing for tax write-offs.
6) Tangible asset
Having an asset that you can see and touch creates a comforting feeling that you’ve bought something solid and stable. Besides, there’s a limited supply of land while the demand for it continues to increase, so it’s advisable to grab a piece of it.
Disadvantages of property investments
Properties are not as liquid as stocks or other investments where you can pull out your money anytime you want. If an emergency happens and you need cash, you may not be able to immediately convert your property into cash.
2) High cost
You can’t buy a land for a $100. Unlike stocks where you can buy only a few shares as the board lot allows, properties are all-or-nothing. You can’t buy only a small parcel that will fit your $1,000 budget. A huge capital is needed in order to get into this kind of business.
It’s also not a one-time thing where you only need to spend money upon purchase. There are cumulative costs and monthly fees you have to worry about. Moreover, maintenance of the property – plumbing, paint, roof, electricity, and telephony – is nowhere near cheap.
4) Possible liability
If you bought property in a poor location, you’ll have a non-performing asset in your hands. It’ll be hard to look for buyers and it may take years before returns are realized (if there’ll be any).
5) Interest rates
Mortgaged properties may experience trouble when interest rates start to hike. The monthly repayments for the loan may become higher than what you earn from renting the property.
6) Problematic tenants
Even if you screen tenants applying to rent your property, you can’t really gauge how they’ll behave once they get accepted. Although it’s rare to have rude tenants that will cause havoc to your property, it’s best to prepare for the worst by having additional funds for your maintenance costs.
Property investment is a relatively easy market to learn about. You can learn how things work without having to specialize in property brokerage, land taxation, or other complicated stuff.
Property investment has its own pros and cons. Our advice is to invest in other vehicles other than property. Supplementing your portfolio with ETFs, stocks, bonds, and other investment options will give you diversification and an added layer of security in case one sector falls behind the others.