- Investors can diversify their portfolios, save for retirement and grow their wealth with real estate investments.
- Real estate investments offer relatively low risk overall, and investors can choose specific investments that best suit their risk tolerance or buying power.
- Investors should consider their financial strategy, buying location, property type and other factors when choosing real estate investments.
According to statistics from the Australian Taxation Office in 2018, around 20% of Australians held an investment property.1 With growth in Australian real estate markets, even more investors are eager to get exposure to the real estate market.
Real estate investments can grow your portfolio and income, but investing isn’t always straightforward. A strategic approach is necessary to help your real estate investments perform.
Types of Real Estate Investments
As an investor, you can take advantage of a range of real estate investment options. Rental properties are a popular choice as they can generate regular income and build appreciation, but managing a rental property requires significant hands-on work. Flipping homes likewise requires hands-on work and may have unexpected costs, but repairing and quickly selling a home can be a lucrative way to earn a profit.
Other forms of real estate may not grant you direct ownership or control over a property but can earn dividends and capital gains. Some options include:
- REITs
- Real estate mutual funds
- Real estate investment groups
- Crowdfunding
The Good Brigade / GettyAdvantages of Real Estate Investments
Real estate investments can provide attractive benefits. Rental properties earn regular rental income, and home flipping or appreciation can yield capital gains. Certain real estate investments may also qualify for tax deductions or incentives, such as the 50% capital gains tax discount on homes held for 12 months or more.2
Compared to stocks, crypto, commodities and other types of investments, real estate offers relatively lower volatility and risk. You also don’t need specialised knowledge to start investing in property.
Disadvantages of Real Estate Investments
There are a few drawbacks associated with real estate investments. Purchasing a property and taking on a mortgage ties up your cash, which means you have less cash liquidity in case of emergency or other financial needs. Rising interest rates may also result in higher repayments or longer mortgage terms.
Rental properties may go through prolonged vacancies or require additional repairs and maintenance, which can create a negative cash flow. Home flipping may impose unexpected costs, hurting the bottom line of your investment.
Although real estate is generally more stable than other investments, it’s still subject to market fluctuations. A seller’s market may make getting real estate market exposure difficult, while a buyer’s market may cause problems with selling your property at a profitable price.
Australia Real Estate Market
Following rapid price and sales growth, the Australian real estate market has slowed but maintained overall growth as of 2022. Factors such as tighter credit requirements, economic recovery and higher mortgage interest rates are likely factors in fewer listings and developments.
Purchase prices aren’t equal across Australia. Sydney had the highest purchase prices at over $2 million as of June 30, 2021, with Melbourne close behind.3 Areas such as Darwin, ACT and Hobart had many fewer listings and overall sales.
Rental prices increased 8.2% from 2020 to 2021, but rental income has dropped. Darwin saw the largest increase in rental prices with a 23% increase, but Melbourne only grew 3.5%.
Financial Strategy and Goals
Each person’s financial strategy should be personalised according to their property investment goals. Some common goals include:
- Diversify investment portfolio
- Save for retirement
- Generate passive income
- Achieve financial freedom
- Protect wealth against inflation
Once you’ve determined your goal, you can create a strategy around the types of property you should invest in to maximise your returns. You’ll also consider other aspects such as your risk tolerance, buying power and time commitment.
For example, flipping homes is a riskier investment that can have high yields, while options such as REITs or crowdfunding are lower risk but pay smaller dividends over time.
Costs Involved in Real Estate Investments
Purchasing, managing and selling an investment property can come with many costs that should be considered when picking investments. Buying and selling properties involves legal costs, conveyancing fees, real estate agent fees and inspections. You may also have to pay capital gains tax if your property’s value increases.
Owning an investment property has its own costs. In addition to utilities, building and landlord insurance and land tax, you’ll also have to cover repair and maintenance costs. If you own a rental property but don’t want to invest the time into managing tenants, you’ll pay for a property manager to handle these tasks for you.
Cash Flow Analysis
Negative, neutral or positive cash flow refers to the net balance after paying ongoing costs such as mortgage payments or repairs. If you’re buying a rental property, a cash flow analysis can help you generate a positive cash flow. Depending on the size of your property, you should aim to earn a few hundred dollars after expenses each month.
Calculating cash flow requires subtracting expenses from gross income, but some factors complicate this equation. Rental income may fluctuate if your property has vacancy periods or tenants owe funds for late fees or additional amenities. Taxes, mortgage payments and other fixed items are predictable expenses, but unexpected costs may hurt your cash flow. Calculate an extra percentage for unforeseen costs to buffer your cash flow.
Loan Options
A number of loan options are available in Australia, and each comes with terms and features to suit different buyers. Mortgages come with fixed, variable or split interest rates and offer a variety of repayment terms and agreements. Lines of credit or construction loans can also provide funds needed for repairs or to accommodate cash flow fluctuations.
Specific loan terms depend on factors such as your credit history, liquid cash and debt-to-income ratio. However, lenders generally impose higher down payment requirements and interest rates on investment property loans as the risks of default and foreclosure are higher.
Location
If you’re buying a rental property, consider proximity to amenities and neighbourhood features that can attract renters, such as the distance to schools, parks and hospitals. Considering location features from tenants’ perspectives can help establish a competitive rental property, but areas with extra amenities may have higher property taxes.
Vacancy and rental rates for the area can also give you insight into whether renting is a lucrative option. Low vacancy rates mean your property will have more consistent tenancy, but high vacancy rates may result in a negative cash flow if you’re without tenants for months at a time.
Growth Potential
Areas across Australia offer distinctive real estate markets and economies that should be considered when choosing where to buy. For example, a $1 million property may be overpriced in Darwin but a deal in Sidney. Certain areas may have generally lower listing prices, but others may be too expensive for buyers entering the real estate market.
Other factors can help determine if an area presents good investment opportunities. Although Australian residential property prices increased 23.7% over 12 months in 2021, some cities represented much higher purchase price growth rates than others.4
Property Type
Condominiums, single-family homes and other residential properties come with respective pros and cons. Condos are low-maintenance as the strata generally covers external repairs, but you’re obligated to pay strata fees on top of your mortgage. They also tend to have relatively low rents, higher vacancy rates and slower appreciation. However, proximity to downtown amenities may attract renters.
Single-family homes may have better rental income and appreciation potential but are often more expensive than condos. Houses tend to have higher maintenance and repair needs than condos, which means you’ll need extra time to work on the house or pay for contractors.
Overseas Property Investment
With steadily growing purchase prices and emerging real estate markets, investing overseas is a lucrative option for investors who don’t want to limit their property investments domestically. Countries such as the United States, U.K., Germany and Canada offer stable growth rates and rental income. Emerging markets in countries such as Brazil and China offer lower entry costs and barriers.
Factors such as global politics, currency risks, taxes and real estate regulations may affect investment property opportunities. Lenders may also impose more stringent requirements for foreign investors.
