6 min read | 18 Jul 2019
On the first Tuesday of each month, the news leads with the RBA decision on interest rate movements. Will they raise it, leave it or drop it? And after that, there are days of speculation about property and investors. We talk ad nauseam about property prices, over our smashed avo on toast at the local cafe, but is real estate investment all it’s cracked up to be?
The short answer is yes, in the long run. Provided you go in with a solid understanding and strategy on what you hope to achieve, an understanding of how the real estate market works and ideally an ability to invest for a full cycle (7+ years).
Before investing, you need to understand whether you are looking at achieving “capital gain” or making an income from “rental yield”.
Capital gain is the difference between the price you purchase a property for and the price you sell (your profit).
Investors in it for a capital gain may speculate that house values will rise in the area over the medium or long term, and buy at a low price with the goal of selling at a higher price. They may also look to purchase, renovate and sell in the short term, which is also referred to as “house-flipping.” Opportunities for this in the current market are few and far between.
While those seeking capital gain may rent their property out, their primary objective is to make a profit when they sell. These investors are more likely to use negative gearing in their investment strategy - which is offsetting losses from rent and expenses against their taxable income.
If capital gain is what you are after, remember that you will be subject to capital gains tax when you come to sell. Currently, it’s paid as part of your income tax on the profit you make from the sale. If you have owned the property for longer than 12 months, then you may be eligible for a 50 per cent discount.
Many investors are primarily looking to make a profitable income through their rental yield -which is the amount of income from rent minus ongoing property expenses. The yield (or return) is presented as a percentage of the property’s value.
To calculate yield, you need the following equation - (R-E)÷V x 100. In plain English, you subtract ‘Annual expenses or loss of rental income’(E) from your ‘Annual rental income’ (R) then divide the result by the ‘Property value’ (V) and multiply by 100.
While there is no hard and fast yield figure to aim for, the industry generally recommends going for 5.5 per cent or above. The higher the rental yield, the better in terms of peace of mind, knowing the cash flow you generate will cover mortgage repayments and expenses and give you a buffer if rates rise, or you have no tenants.
The best investment strategy should aim to achieve a balance between yield and capital gain - you want to make some money in rent (or offset your losses against your tax), but you also want the property value to rise, so you can make a profit when you sell.
Contrary to popular belief, you don’t have to be super wealthy to invest in property. Both ATO and CoreLogic data reveals most property investors in Australia are middle-income earners on an income of between $60,000 and $80,00 p.a. Less than one per cent of all investors have a mega portfolio of six or more properties, and property investment is definitely attainable for the average Australian.
The news cycle at present is full of stories of a housing slump and falling property prices. According to CoreLogic, the average house price across all capital cities fell by 2.4 per cent in the December quarter last year, and Moody’s Analytics has predicted a further 7.7 per cent decline this year. That sounds scary, but consider that in 1993 the average home value was a mere $111,500, rising about 6.8 percent per year, with a median house value hitting $571,400 at the end of 2018, so in the long term, investors who have held onto their properties are generally still in front.
If the average long term growth in values continues as it has been (give or take a couple of blips) then in 25 years we will see a median dwelling value nationally of $2.9 million! Definitely not all doom and gloom if that plays out.
A decline in house prices now is also fantastic if you are considering starting your investment property strategy because you may be able to buy at a better price while the market is soft.
Many investors may make interstate purchases following advice from an “investment guru”, and then become surprised when their property isn’t living up to the income hype. Looking in your home town or city, in areas where you are familiar with the house prices may help avoid any major mistakes.
If you aren’t across the local real estate market, look at recent sales and auction clearance rates. Also, check out the local rental listings to get an idea of what sort of income you could expect. Check especially where the rent seems high for the property values as this is a good indicator of high rental yield.
At present, new properties are being built around the fringes of most capital cities, including new transport infrastructure. As more people move to these suburbs and demand increases, the likelihood is that property prices will rise, and rental accommodation will be in demand.
Ideally, you want to invest in an area with low vacancies. If there are loads of empty rental houses, it could indicate a less than ideal area for tenants, and also hint that your property could be vacant for some time.
Units are easier to maintain than houses and in some urban areas are preferred by tenants. Remember though if you buy a unit, you will have the additional costs of body corporate or strata fees which will affect your rental yield. Look at the preferred style of property for tenants in the area you want to purchase.
Unlike buying your own home, where you fall for the darling water feature in the front yard, searching for investment property means thinking about the features tenants will like: functional kitchen and bathroom, proximity to public transport, schools and shopping. Tenants are less inclined to choose high maintenance features like a pool or a prize rose garden that needs constant upkeep.
Don’t just try to appeal to singles, or couples or families. Try to choose a property that will appeal to more than one demographic to increase your chances of keeping it tenanted year-round.
It goes without saying that when you are looking at investing in property, you should also be scoping out the best home loans. Many larger lenders offer higher rates to investors, but at Athena, we offer investors some of the best rates around, check them out here. We also offer you loyalty rewards with a rate discount for every year you are with us and make your repayments on time for the first five years, so if you are in the market for an investment property, be sure to find a lender who’s with you every step of the way.