Maybe it’s time to consider some home truths about investing in residential real estate.
A whole new generation of investors have been lured into property on the back of our booming property markets, and this is understandable – it happens every cycle.
Last year Shane Oliver, head of Investment Strategy and Economics and Chief Economist at AMP Capital, outlined some key considerations when it comes to owning an investment property.
Here’s what he said:
1. Property prices don’t always go up
Believing that property always goes up is understandable―especially given prices have dramatically increased in the major cities of Sydney and Melbourne in recent years.
It’s important for SMSF investors to understand that like most investments, the property market demonstrates cyclical patterns.
That means, at times property performance can be stagnant and show little or no growth.
We can see in the chart below that like many investment cycles, a boom can be followed by a bust.
Source: ABS, AMP Capital
2. Not all property is the same
When we think about property, we tend to think about it as one housing market.
As such, when we hear about the performance of Australian property, it can be easy to think that buying a property anywhere will turn out to be a good investment.
This approach can lead to decisions that fail to yield the results we expect.
Within residential property, there are countless micro-markets and property prices can depend on the different economies associated with these areas.
For example, in Australian mining towns, we saw prices reach record highs during the mining boom only to fall sharply more recently.
Similarly, price expectations in central business districts will be markedly different from those in a particular region or suburb.
General reports in the media about rising property don’t mean that prices in all areas will always rise.
3. Residential property is notorious for its high entry and exit fees
Buying, selling and managing an investment property can be costly and this will impact your net return.
When you buy a residential property, you will have to pay for lots of extras on top of the purchase price.
Costs may include stamp duty, conveyance fees, legal charges, search fees, and pest and building reports.
When you come to sell the property, you will have to pay agent’s fees, advertising costs and legal fees.
You may also have to pay capital gains tax.
If you decide you want to buy an investment property, you’ll need to work out how much money you can potentially earn from your investment.
To do this, you’ll need to consider the ongoing costs that you’ll be responsible for.
These may include council rates, water rates, land tax, insurance, body corporate fees (or strata levies) and property management fees.
Don’t forget interest repayments and possibly tax to be paid on your rental income, as well as maintenance costs.
Some key investment tips
- Think about property as a long term investment;
- Invest within your means: The combination of low mortgage rates and rising home values means debt levels have increased dramatically.
Ensure you can comfortably service your investment;
- Don’t put all your eggs in one basket:
You can protect your money by spreading risk across a range of property types.
Industrial and commercial properties such as shopping centres and offices offer a differentiated set of risk and return characteristics to residential property.
- To find out about AMP Capital’s commercial property capability click here.
With so much emphasis on property in the media, it can be difficult to sort fact from fiction.
Before investing in any type of asset―including property―it pays to consider the pros and cons, and any commonly-held misconceptions.