Many Australians consider residential property to be a good investment. So, what are the advantages of purchasing an investment property, and is it appropriate for oneself?
Typically, property investment is done for either capital growth (as the property’s value rises over time) or rental income (by leasing the property to tenants).
While some types of properties can give a balanced mix of returns, it is extremely unusual to locate a property that can generate both capital growth and rental income.
Here are some considerations to help you decide which is best for your scenario.
Investing for capital growth
Capital growth occurs when the value of property improves over time, increasing the owner’s personal wealth.
When the value of a property rises, investors might use the equity (the difference between the property’s worth and the amount of debt owed on the mortgage) for personal purposes, such as purchasing another investment property, going on a vacation, renovating their home, or purchasing a new car.
Alternatively, the owner can sell the investment property and keep the proceeds, or use them to help pay off the mortgage on their primary residence. It is crucial to note, however, that there will be tax to pay on the gains, as well as selling agency costs for the sale of the property. Discover why the Real Estate is a long-term investment.
While calculating predicted returns, investors should consider any other costs they’ve incurred along the way, such as loan interest and stamp duty, and settlement fees paid when purchasing the property.
Use our simple home loan fees calculator below to find out more about the costs of purchasing a home.
Investing for rental income
Rental revenue is the money you make from renting out your home to a tenant.
If the rental revenue exceeds the expenses of owning the property (such as loan repayments, maintenance charges, and property management fees, among other things), the property is categorized as positively geared, which means you end up with additional money in your pocket each week. This money is effectively an additional source of income that can be utilized for discretionary spending, bill payment, or debt repayment on your family home.
If the rental revenue does not cover all of your holding costs, you will have to contribute part of your own money to meet these payments — this is referred to as a negatively geared property.
If the property is negatively geared, it is especially crucial to consider the impact of additional mortgage payments on your budget if interest rates rise.
An excellent technique to establish if a property has a high rental income is to calculate the rental yield, which is a computation of the property’s valuation and the annual rental revenue.
By calculating a property’s rental yield, you may compare it to other homes in the same suburb or city to see how it stacks up. In a nutshell, rental yield is a more accurate comparison of rental returns.
What is rental yield?
The monetary return (i.e. rental income) you earn from leasing your investment property to a tenant is referred to as rental yield. It is expressed as a percentage and might be either gross or net yield.
The overall cash return earned by your property before expenses such as property management fees, loan repayments, and insurance, for example, is known as the gross yield. The net yield is the monetary return that remains after deducting all expenses.
How do you calculate rental yield?
Consider a $400,000 investment property with a tenant who pays $350 per week in rent.
Gross rental yield
Find the annual rental income: $350 per week x 52 weeks = $18,200.
Divide the annual rental income by the property’s cost and multiply by 100.
$18,200/$400,000 multiplied by 100 equals 4.55 percent
Net rental yield
Because net yield considers all expenses associated with the property as well as the entire cost of the property, not just the purchase price, it provides a better indicator of whether you can afford to hold an investment property.
Examples of expenditures and expenses that must be considered when calculating net rental yield.
Property expenses:
- Fees for stamp duty settlement
- Fees for building and pest inspections
- Loan fees
Annual costs:
- Fees for property management
- Periods of vacancy
- Insurance is priced by the council.
- Fees for strata and maintenance
- Repayment of loan interest
The net rental yield is more complex to calculate because it takes into account a variety of fees and expenses. It can, however, be calculated as follows:
[(Annual rental revenue – annual expenses) / total property cost] multiplied by 100.
It is important to note that rental yields are influenced by a variety of factors, including the type of property (house, apartment, villa, etc.), its age (newer vs older), its location (state vs. state, country vs. regional, inner-city vs. urban fringe, etc.), as well as the demand and supply-side drivers. Karaikudi is a lovely place in which to invest in real estate.
Investing for tax benefits
Some people invest in real estate for tax advantages, such as depreciation claims.
Investors who purchase a brand-new investment property can deduct some depreciation from their taxable income, such as the depreciation of the building and things classified as plant and equipment, such as hot-water systems, air-conditioning units, and draperies.
If the property is negatively geared, investors can deduct their losses from their taxes.
While tax benefits can be advantageous, they should not be the major motivator for purchasing an investment property, since you may wind up with an underperforming home. Investors and those considering investing should stay up to date on the newest tax legislation, as they are subject to change.
Determining what’s right for you
It is critical to understand what you want from an investment property and to identify the types of properties that will assist you in meeting your investment objectives.
Some properties may generate higher rental income while others may have greater capital growth potential, but an individual property rarely provides both.
It might also be beneficial to seek guidance from industry professionals such as an accountant, financial planner, Home Lending Specialist, or buyer’s agent.