The pros and cons of investing in property to build wealth
Investing in property could allow you to build significant wealth and secure an income stream for the future, but it's not without risk. If you're thinking about investing in property, you'll want to understand the potential limitations and drawbacks as well as the potential advantages of property investment. Here, we outline the top pros and cons of building wealth through property investing.
Potential advantages of investing in property
Property investing comes with a lot of potential advantages. This explains its popularity with investors.
1. Easier to understand
Investing in residential property could be easier for some than gaining confidence in investing in the sharemarket. You don't need special qualifications or expert knowledge to invest in property.
As the saying goes, property investment could be as safe as houses. Property is often seen as a more stable option than alternatives, as it’s a tangible asset. Property is generally less volatile than options like shares, for example.
3. Income stream
As long as the property is tenanted, you can generate an income from the rent. This can be used to cover mortgage repayments and other costs.
4. Capital growth
At the same time, your property could be passively generating wealth for you in the form of capital growth. You can tap into this equity by using it to finance another investment property, or when you sell the property and realise the capital gain.
4. Tax benefits
You could offset your property expenses against your rental income. This includes the interest on the loan you used to buy the property. In addition, you can take advantage of strategies like negative gearing to minimise your tax bill.
5. Leverage to buy
Because lenders are usually happy to use underlying property to secure the loan, you're leveraging a 5% or 10% deposit to own a property that's worth many times more than the money you put up.
You could buy your first investment property while renting yourself and get on the property ladder earlier than expected. This means you might be able to live in the suburb you prefer while building up equity in a property you own, one that's generating rental income at the same time.
Potential drawbacks of investing in property
As with any type of investment option, property investing can come with certain drawbacks.
Unlike investment alternatives like shares, buying and maintaining a property tends to cost more. You'll need to pay one-off purchase costs as well as selling costs, if you eventually sell. Maintenance and repairs can also be expensive.
Along with stamp duty, legal costs and building reports, you'll need to factor in ongoing costs like mortgage repayments, council and water rates, insurance, land tax, property management fees, and body corporate fees. In addition, your rental income might not cover your mortgage repayments and other ongoing expenses.
2. Dependence on tenants
If the property is vacant, you're not generating rental income. You might need to keep the property occupied for most of the time to cover a good amount of your ownership costs. In addition, nightmare tenants can lead to ongoing headaches.
3. Illiquid investment
Property is considered an illiquid investment, which means you can't easily offload it to generate some cash flow in an emergency like you could with shares. In addition, property is sold as a whole, so you can't sell only a portion like you can with shares if you wanted some quick cash. It can take weeks or months to sell your property.
4. Hidden issues
You can have hidden issues come to light years after you've purchased the property even if you have all the right checks done on the property.
5. Lack of diversification
Since property costs more to get into, some investors might have all their eggs in just the one basket instead of diversifying their investment mix. Add to the scenario sudden changes like rental vacancies and changing interest rates and you could be subject to higher risk than you might be aware of.
Avoid the pitfalls
Investing in property is generally seen as a safer option (than investing in the sharemarket) for good reason: the underlying asset could produce rental income as well as capital gains. You can take advantage of tax benefits while leveraging just 10% or so (deposit amount plus purchase costs) to buy into full ownership of an asset that could continue to generate wealth for you for the long term. The drawbacks, like costs, exposure to tenants, interest rates, and lack of diversity could be managed as long as you have a strategy for dealing with them.
Loan Market is a family owned, Australian company and a leader in the mortgage brokerage space. Our multi-award-winning team of brokers has a wealth of experience in helping you find the right loan for your needs, without the complexity and jargon. Contact us today for a discussion about your property investment loan needs.