Advantages and Disadvantages of buying an investment property

  • Some people purchase investment properties for tax deductible purposes while the others purchase the properties for more income.
  • The interest charged on investment loan is normally tax deductible. Investors can use it to claim tax or pay lesser tax.
  • Investment property does not only benefit the one who already had their own property, but it also benefits First Home Buyers. People will have higher borrowing power with an investment loan rather than a standard home loan.
The lenders’ point of view:
  • To the banks, the investment loans have higher risk than a standard home loan. It is not always easy for the banks to sell your investment property as sometimes, the tenants are not willing to move out. Due to that reasons, the banks have stricter policy with investment loans and most lender only accept loans at lower LVR. However, some lenders are willing to provide loans up to 95 per cent LVR.
Advantages of purchasing an investment property:
  • As the property market is more stable than the other markets, investment property generates fixed returns to the investors.
  • The income is more certain because you receive constant rental payment from the tenants. In the case that the rental income is higher than the mortgage repayment, you do not need to put any extra funds to pay off the loan and you may also have surplus funds to cover any property costs incurred.
  • If you purchase the property in a good location, the property value will increase and you can generate more profit.
  • Any tax associated with the expenses paid on the investment property, such as property maintenance, council rates, fees charged by managing agent can be claimed back at the end of the financial year.
  • If you have an investment property, you can also use the existing equity in the property to get another loan or to purchase another investment property.
Disadvantages of purchasing an investment property:
  • The initial costs to purchase an investment property are normally very high.
  • It may take a long time to sell the property. Especially when you are facing financial hardship and you need to quickly sell the property, you may need to sell it at a er price. If your property is not located in a good area, it may stand in the market for a long time before it is sold.
  • After you purchase the property, you may not be able to rent it out straight away. You will need to spend some time to find the tenants. If this is the case, you may need to pay extra funds to cover all the expenses, such as mortgage repayments or property maintenance.
  • The most common case is that your tenants move out after they finish contract, it normally takes some time to find another tenants. As an obvious, you will be short of income during this period. You may also need to cover difference when the rental income is less than the repayments on your mortgage.
  • The property value can increase but it can also decrease depending on the market. Especially during the financial crisis, most investors face financial difficulty because they spent all their funds in the investment property but it could not be sold or was sold at a lower price.

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