Buying a property to rent out is a popular form of long-term
investment. Houses and units are easier to understand than many
other types of investments, yet they do have some issues you need
to be aware of.
Here's how to check if this type of investment suits
Pros and cons of
Investing in property is often seen as being less risky than
other forms of investment, but it does have some potential
|Less volatility - Property can be less
volatile than shares or other investments.
Cost - Rental income may not cover your
mortgage payments or other expenses, so you may have to find other
money to cover the costs.
|Income - You earn rental income if the
property is tenanted.
||Interest rates - An rise in interest rates
will mean higher repayments and lower disposable income.
|Capital growth - If your property increases in
value, you will benefit from a capital gain when you sell.
||Vacancy - There may be times when you have to
cover the costs yourself if you don't have a tenant.
|Tax deductions - Most property expenses can be
offset against rental income, for tax purposes, including interest
on any loan used to buy the property.
||Inflexible - You can't sell off a bedroom if
you need to access some cash in a hurry.
|Physical asset - You are investing in
something you can see and touch.
||Loss of value - If the value of the property
goes down you could end up owing more than the property is worth,
this is known as negative equity.
|No specialised knowledge required - Unlike
some complex investments, you don't need
any particular specialised knowledge to invest in property.
||High entry and exit costs - Expenses such as
stamp duty, legal fees and real estate agent's fees make buying and
selling property very expensive.
Don't invest only in property
If you invest exclusively in property, you will have a lot of
money riding on one market. If you also own your home, you will
have all of your wealth concentrated in the property market.
This is poor diversification and increases your
risk. Investments such as managed funds and ETFs allow you to invest
in a broader range of assets, which
will reduce your overall risk. Take our investing
challenge to test your knowledge of risk and
Buying an investment
Remember that property values can fluctuate over time. For
example, the value of Gold Coast units fell by 17.9% between
February 2008 and March 2013 (Source: rpdata - Rismark 2013).
Where and what you buy will affect your
return on investment. Here are some tips to help you identify a
good property investment.
Where to buy
- Familiar markets - Consider buying
property in an area you are familiar with as it will take you less
time to research. Check recent sale prices in the area to give you
an idea of what you can expect to pay for local properties.
- Growth suburbs - Look for areas
where high growth is expected, where there is potential
for capital gains.
- Rental yield - Look for areas where
rents are high compared to the property value.
- Low vacancy rates - Find out about the vacancy
rates in the neighbourhood. A high vacancy rate may indicate a less
desirable area, which could make it harder to rent the property
out, or sell it in the future.
- Planning - Find out
about proposed changes in the suburb that may affect
future property prices. Things like new developments
or zoning changes can affect the future value of a
What to buy
- Attractive features - Look for properties that
will appeal to as many people as possible, like a second bathroom,
lock up garage or nearby shops, schools and transport.
- Wide appeal - Find a property that will
attract more than one segment of the rental market such as singles,
couples, young families or retirees.
- Low maintenance - Keeping costs down
is important, older homes or those with features such as a
pool or extensive landscaping may cost more to maintain.
- Property type - Units can be easier to
maintain than houses, although you will have to pay body
Investment property advisers
Think carefully before using the services of groups
of professionals who work together and recommend each other's
services, such as property developers, accountants, lawyers and
mortgage brokers. Be particularly wary if they recommend that
you invest in a property market you are not familiar with. Do your
own research and choose your own service providers.
Property investment seminars
If you are thinking about investing in property, you might
decide to attend a seminar that promises to make you a fortune
through property investment.
These events often use high-pressure sales tactics to rush you
into making big property investment decisions. Find out how to spot
the warning signs of a dodgy investment seminar.
Costs of property
Buying, managing and selling an investment property can be
costly and will affect your overall return.
Buying an investment property
Some of the costs involved with buying an investment property
include: stamp duty, conveyancing fees, legal costs, search fees,
and pest and building reports.
Owning and managing an investment property
When you own an investment property, you will be responsible for
such ongoing costs as: council and water rates, insurance, body
corporate fees, land tax, property management fees (if you use an
agent), repairs and maintenance costs.
If you borrowed to invest, you will also have mortgage
repayments, and if your investment is positively
geared you may pay tax on your rental income.
Use our mortgage calculator to check you can afford the
repayments on an investment property.
Many people use interest-only loans to fund an investment
property. Use our calculator to see what an interest-only loan will
really cost you.
You can either manage your property yourself or engage a
managing agent to do it for you.
If you manage the property yourself, you will avoid paying
management costs but you will have to do everything, from showing
the property to tenants to collecting rent and organising repairs.
You also need to comply with landlord regulations.
If you use a managing agent to look after the property, the
management fees you'll pay are tax deductible.
While you don't need to pay for home contents insurance, you
will need to organise building insurance which cover you for
building replacement if, say, the house burns down. If you buy a
unit, building insurance will be paid from your strata levies.
You should also consider taking out landlord insurance. This
protects you if your tenant damages the property or if they leave
without paying the rent. The cost of landlord insurance is tax
If you are relying on part of your salary to cover your
repayments and expenses, make sure you have adequate income
protection insurance. Your ability to earn an income may be the
most important asset you have.
Repairs and maintenance
You need to include repairs and maintenance in your property
budget. If your tenant complains that the oven is not working or
the shower starts leaking, you need to fix it straight away.
Only renovate your investment property if you think it will
increase the rent you can get, or if it will make the house or unit
more appealing to renters. Property improvements are not tax
Selling an investment property
If you decide to sell your property, you will have to pay
agent's fees, as well as advertising costs and legal fees. You
may also have to pay capital gains tax if the
property has increased in value.
Positive or negative gearing
Most people will borrow to invest in property. This
is called 'gearing'. Negative gearing is where the income from your
investment is less than the expenses. Positive gearing is where
your income from an investment is higher than your interest and/or
other expenses. See negative and positive
gearing for more information.
Work out your income and expenses
Once you have a property in mind, think about the income you
expect to receive from it and what your regular expenses will be.
If there is a shortfall, think about whether you can cover it
long-term. Also, work out whether you could cover all expenses
short-term if you had no tenants for a while.
Case study: Juhyan and Jennifer consider an
Juhyan and Jennifer are considering buying an
investment property in Sydney. They spot a unit that ticks
all of their boxes: it's close to a train station and is
a 10 minute walk to restaurants and shops.
The property price is $550,000 with buying costs of $23,000.
They have a deposit of $150,000 so they will need to
borrow $423,000 to complete the purchase. Their monthly income
and expenses are expected to be:
|Income and Expenses
|Less loan repayment
|Less allowance for expenses
Juhyan and Jennifer can easily cover the monthly shortfall with
Jennifer's salary, which they currently save, and they have an
emergency fund they can draw on if they were suddenly without
tenants for a while.
Investing in overseas property is more risky than investing in
property in Australia. It is much more difficult to make sure the
investment suits your needs if you don't have local knowledge and
you can't regularly inspect the property.
ASIC has received complaints about promoters who encourage
Australians to invest in the United States property market. If
you've been 'invited' to invest in a supposedly 'cheap' overseas
property, ask yourself why they need someone in Australia to
invest? Why aren't savvy locals investing? Chances are it's a dud
Here are some things to consider if you're thinking about
investing in property overseas:
- Distance - Good tenants and good property
managers are hard to manage when you're so far away from the
- Renovations and repairs - Expensive
renovations and repairs may be needed, especially if the property
is prone to squatters and vandalism. Buying property sight unseen
is also a big risk.
- Hidden costs - You must factor in Australian
tax laws, local property taxes, insurance, management costs, and
ongoing repairs. There are lots of hidden costs that the promoter
may not tell you about.
- Exchange rate - Changes in the exchange rate
could affect the amount of income you receive
Investing in property may be a good way to grow
your assets, however, as with other types of investments, it's
important to do your research and seek professional advice if
you're unsure about any aspect of the investment.
Last updated: 13 Oct 2016