Investing In Australian Real Estate
Our aging population and our expectations of a given right to an aged pension has changed to a great extent over the past decade. More and more we are seeing the challenge faced by those nearing retirement, without a property investment portfolio or another form of income generation. Suddenly the realisation that the projected income for the retirement years may fall well short of what we need to allow the lifestyle we have grown accustomed.
When this realisation hits home, real estate investing is often the first choice to accumulate a nest egg for retirement. With the expectation of properties doubling in value over the next 7-10 years as has done in the past, the rush is on to pick up a bargain, in a good location that will become the perfect rental property. The search for professional property management for this investment property is paramount in ensuring good returns and low maintenance over the ensuring years.
Real estate investing has always been the more popular vehicle chosen by average Australian Mums and Dads to build a nest egg for their retirement. The increased popularity of self managed superannuation funds makes investment properties along with the share market the more popular forms of investment. The old adage of investing in “bricks and mortar” still gives the both the experienced and the novice investor a greater feeling of confidence.
We are also seeing more of the “X” and “Y” generation, opting to live at home longer enabling them to purchase an investment property. Rental property with taxation benefits through negative gearing and generating an income, may allow them to obtain finance to begin real estate investing whereas a home for them to occupy may be out of reach financially. This generation often are on huge salary packages, although lifestyle and the inability to save for a deposit impacts on their ability to buy their own home.
Another way many of the younger generation (and some of the older ones too) are getting into real estate investing is by pooling their resources. Individually it may not be possible to finance or service that first and subsequent investment property. With the joint efforts and income of a sibling or friend, the realisation of building an investment property portfolio may be achievable.
With the demand for rental properties in many parts of Australia presently outstripping the supply, many investment property owners are now fortunate enough to have “positively geared” rental properties. This in turn may allow them to use the equity to purchase multiple properties. Stories will often appear in investment magazines of “average” Australians who have accumulated enormous wealth by real estate investing.
As we discussed in an earlier section of this website, “you do not make your profits in real estate investing when you sell a property, it is made when you buy the property” This again goes back to the importance of buying well. Capital growth will be augmented by timing, position and strong negotiation skills.
Some investors believe there are easier vehicles for making money than owning investment properties. The time needed to research and to understand real estate investing may be complicated and time consuming, but the rewards can be well worth while. The time and effort you spend on researching and purchasing rental properties becomes easier with experience and can also become a lot of fun.
Have you ever heard the old saying of “it’s as safe as houses”? Even allowing for the ups and downs (or cycles) of the real estate market, most people believe residential real estate investing is a sound investment. Banks have traditionally recognised property, in particular residential property as excellent security, knowing that property values have never fallen over a long period of time.
An important thing to realise is that approximately 70% of residential property is owner occupied, meaning average mums and dads paying a mortgage to keep a roof over their family’s heads. Only around 30% of the total properties are investment properties. That is quite unique in itself, giving the residential investment property market a built-in safety net with the large percentage of homeowners underpinning property values, with no panic selling like you see at times with say the share market.
According to the BRW Rich 200 list, property is consistently been a major source of wealth, not just in Australia but all over the world. Real estate investing as we have explained is not just for the wealthy! Anyone can do it! As we have mentioned, more and more investors are pooling their resources to purchase a rental property. The need for large amounts of capital is no longer the case as it was 10-15 years ago.
At the present time most banks and financial institutions will lend up to 95% of the purchase price of a property, in many cases even up to 100% plus costs for an investment property if they believe the serviceability is sound. Never has it been easier than in the past few years for people to borrow, especially to purchase a rental property because of the low vacancy rates experienced presently throughout the country.
With the threat of higher interest rates and a market experiencing prolonged stability in most areas of Australia, (due largely to the resources boom) there is the danger of the financial sector making borrowing criteria more difficult. But it has been proven again and again that ordinary Australians can build extraordinary wealth through real estate investing, with careful and intelligent planning.
Once an investment property portfolio becomes your strategy to building wealth, your research should include finding and building relationships with a real estate agents you trust. With the present age of technology, you need to be advised of quality investment properties as they become available. A quality rental property is generally when demand outweighs supply and the returns continue to grow.
You will also need to source professional and reliable property management services, if your rental properties are spread far and wide, in different cities and towns. This then makes your search a little harder as you need to find multiple property management departments who are efficient, professional and reliable. If you prefer to purchase investment properties in say the city you live in, you may be able to deal with the one property management department to handle all your rental properties.
What other investment portfolio can you insure against risks? With residential property investment you can insure against fire and damage, and there are now multiple insurance policies to cover landlords in the case of malicious damage, tenants leaving your rental property owing rent, even some legal costs may be covered. If you own any rental properties, residential investment insurance policies really are essential!
Statistics show that the levels of owner occupied homes is decreasing in Australia, the reason being as the property prices rise, the affordability factor kicks in and fewer people are able to afford the “great Aussie dream” of owning your own home. In fact some people believe the percentage of Australians renting in the not to distant future may creep up to 40%.
We are seeing the possibility of that prediction becoming a reality with the shortage of land available and housing affordability becoming a major issue and a political nightmare. The rental property shortage continues with almost zero vacancy rates in most major towns and cities. Property management departments are struggling to service the demands of tenants wanting affordable housing, noticing the rising numbers of applications for affordable rental properties.
To summarise, if a property increases in value by say an average of 10% a year you would see that property almost double every 7-10 years, meaning if you paid $400,000 for an average family home in 2005, that same investment property would be worth say $800,000 in 7-10 years and 1.5 million in say approximately 15 years. Not bad capital growth is it! Then of course you have the opportunity to use the equity built in that first investment property to purchase more rental properties and so it goes on.
Remember you are always in control. If you wish to increase the returns from you investment property, you can add value by refurbishing the property, this in turn increases the “rentability” and the rent achieved. You will also often find property management of a refurbished rental property attracts “house proud” tenants.
Tax benefits achievable on rental properties are complex and ever changing. The need to research carefully, what concessions may be claimed at tax time. Check with your accountant or the Australian Tax Office for guidelines regarding improvements to your rental property, property management fees and ongoing costs such as interest on loan repayments and rates. For more information on how you can potentially save thousands of dollars each year through property depreciation schedules, visit the Property Tax Benefits section of our website.
