Investing in Residential Property

Property is a tangible asset, bricks and mortar, something you can see and touch. It exists. It is there. This is a big reason for its popularity. The residential property market is more stable than the share market. Clients are less likely to panic and rush to sell based on short term considerations.

Clients will have more control over property than shares and they can add value to by renovating or rebuilding. Residential property rents usually increase in line with inflation.

Supply and Demand

There is steady demand for good rental properties in most areas. If the landlord is prepared to meet the market in terms of rent then he or she will almost always find a tenant, and the Sunday papers horror stories are not that common in the real world: most tenants take reasonable care of the property and some take great care, treating it as if it was their own.

Some banks lend all or even more of the purchase price, which means capital is not a barrier to entry and almost guarantees a steady supply of potential purchasers when you come to sell.

For higher income earners, the tax treatment allowed by the ATO on rental property acts as a second rent cheque and makes property a more attractive investment.

For higher income earners, the tax treatment allowed by the ATO on rental property acts as a second rent cheque and makes property a more attractive investment.

The ability to use leverage

Clients who borrowed money to gear sound investments in the past two decades or so have mostly done very well. Many wish they had geared more investments. Those clients who lost money tended to sell too quickly. They did not fully appreciate that property investments are long term (at least two decades) and a year or two of poor performance does not mean they should be sold.

Other clients just made poor investment decisions, but they tend to be in the minority. Diversification is the key, reducing the prospects of being left with just one or two poor performing assets.

It is hard to accumulate significant wealth without taking on at least some debt for some time. The amount of debt is a personal choice, and reflects an underlying view of, and attitude towards, risk.

Clients who take on debt to invest will probably end up wealthier than those who do not. But there are no guarantees.

Borrowing to buy growth assets, such as shares or property, and using your own cash or equity in your home as a down payment, helps you increase your returns. You make a profit as long as the investment returns (income plus capital gains) are greater than your interest payments.

An example of increasing returns via leverage:

Lets say Will buys an investment property for $500,000 using a 10% deposit of $50,000. The property earns an annual rent of $25,000.

Thats a 5% return on the value of the property, but a 50% return on the value of the initial capital ($50,000) that Will has put into the deal. 

Read more about Using Leverage To Magnify Returns.

Some Downsides...

On the down sides of residential investments, residential property is illiquid, which means it cannot be easily and quickly converted to cash. You cannot sell the laundry. A house or unit may be slow to sell in a sluggish market. But normally an owner can borrow against the property and this removes some of the liquidity risk.

In addition to the high entry prices, there are many other costs connected to buying and holding residential property.

Stamp duty, solicitors’ costs and bank fees all take their toll: allow 5-7% of the purchase price. And often the already low rental yields are all but eaten up by costs such as rates and repairs, even before interest is considered.

Which highlights that residential property is a capital gains play: people buy residential properties expecting them to go up in value.

And the Australian tax system favours capital gains over other forms of income, not taxing unrealised gains and only taxing half of that gain when it is realised (assuming the property is held for more than 12 months).


HOW WE SUPPORT CLIENTS

At Profy Finance and Wealth, we have supported business and clients who are looking to finance property, investments, homes, vehicles and businesses, through:

  • Providing pre-approval reports with your buying power, including any LVR and LMI considerations
  • Arranging valuation reports to guide you on potential offer prices
  • Calculating and recommending finance options
  • Arranging fully approved finance
  • Arranging value add services such as building and contents insurance, depreciation reports, and legal conveyancing at preferred prices.

At Profy Finance and Wealth, we get more holistic results for our clients. Learn more about how we could help...