Are investment properties still worth it?

An investment property is one of the most common aspirations of the emerging investor. We often see clients who either own or are looking to invest in one, and each bring their own stories about how investment properties have helped or hindered them. 
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So, what is the deal with investment properties? Are they worth it? 

Why are investment properties so popular?
Think of it like this. Have you ever looked at your bank balance and thought, when on Earth did I spend all that money?  

Cash is tangible. You can feel the weight of it; its absence or abundance. You can’t feel your card getting lighter. It happens through a hundred background processes, zipping through wires and ticking code. You tap your card - your balance goes down.  

Let’s apply this principle to an investment property.  

You can walk through your property. You can rent it to people, who you can communicate with. It will be managed by real people, who sit in an office that you can visit anytime.  

Other investments can be intangible. Yes, there are properties, shares, and companies that your money is invested it, but you can’t drop by and make sure they haven’t burned it down.  
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Investment properties are also perceived as being inherently less risky than other forms of investing, though the merits of this are debated and depend on your specific situation.  ​

The Good  

• Lower volatility - Property can have less extreme ‘highs’ and ‘lows’ than other investment types. 
• Consistent Income – If your property is tenanted, you can receive consistent income. 
• Entry Level – You don’t need to know everything about investing before purchasing an investment property. 
• (Generally) Steady Growth – Supply and demand, the state of the economy, and the strength of the rental market are ensuring that most (but not all) property values are growing steadily, or even rapidly. ​

The Bad  

• Vacancies – Lapses in tenancy can mean breaks in your rental income. Remember, you’ll still have to pay your mortgage even if it’s not inhabited! 
• Inflexible – It’s all or nothing. You can’t sell off the kitchen if you’re tight on cashflow or your priorities change.  
• Value – While this may not seem like a possibility in today’s market, there are cases where properties can lose value, leaving you with a net loss.  ​

The Ugly  

• Increasing Costs – Some investors don’t consider how many expenses come with an investment property. From mortgage repayments to maintenance, there are dozens of costs that can hinder profitability.  
• High Entry Costs – Unlike other investments, you will have to make a large initial deposit and likely hold the property for a while before you will see any profit. 
• Bad Tenants – You may encounter some bad tenants that destroy parts of your property, requiring a large amount of capital to implement renovations and taking away from your bottom line.  ​

How do investment properties compare to other investments? ​
Let’s say that you start with $200,000.  
In Townsville, the average property price can range from $500,000 to $700,000.  
If you can secure a property for $500,000, you’ll need to take on a loan of $300,000 with a $200,000 deposit. 
Let’s assume the loan is being repaid monthly at a 5.87% interest rate over 30 years. ​

Here we can see that the rent charged does not cover the cost of maintenance, rates, or loan repayments. This leaves the property with a –2% return.  ​

In comparison, the $200,000 sitting in a bank account has a rate of return of +4%.  
 
We can also run this comparison with no loan. If you have the $500,000 to buy the property outright, your main expense will be removed.  ​

​As you can see, your return on investment is closer to 8% per year. ​

Yet your bank account has still only returned 4%.  
 
Additional factors to consider are: 

• This calculation does not consider tax payable. 
  

• It does not account for factors such as body corporate or strata fees, renovations, or periods between tenants when rental income may disappear. 
  

• Your investment property will generally increase in value over time, increasing your return on investment.  ​
  

How do I know if it’s a good idea for me to buy an investment property? 
We aren’t trying to dissuade you from purchasing one. In fact, if it meets your goals and financial situation, buying investment properties can lead to some amazing results.  

The purpose of this article is to uncover the myth of the ‘most stable investment’. Property has made many people extremely wealthy, but it has also put mums and dads in financial holes not easily escaped.  

Our message to anyone thinking of getting into the investment property market is to: 

• Stop. Think about your cashflow, goals, and objectives. Will this put extra strain on our finances? Can we sustain this for both the short and long term?  

• Consult. Reach out to a financial adviser to understand the impact of this decision on your financial situation.  

• Take it slow. Don’t rush out to buy the first property you find. Ensure that you have taken all considerations on board and are sure you’d like to proceed.  

• Keep track. If you don’t have a property manager or accountant to do it for you, you will need to keep detailed records of your finances. This ensures that you are paying tax correctly and allows you to identify if your property is positively or negatively geared.  

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If you’d like to find out more about the risks and upsides of investing in property, feel free to reach out to one of our expert advisers. ​

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