The pros and cons of buying an investment property

More than 2.24 million Australians - around one in five taxpayers - owned an investment property at last count.

That says something about the popularity of property as an investment: a vehicle generally thought to offer reliable long-term capital growth, decent yields, and tax benefits.

But while buying an investment property and renting it out may seem straightforward, it’s not without its pitfalls.

Let’s check out some of the pros and cons of investing in Australian property.

Advantages of property investing

Capital growth

While property prices can rise and fall, Australian home values have historically shown significant long-term growth.

The median house price in Australia grew 412% over the 25 years to 2018, while units saw a 316% increase.

Rising property prices can also provide an owner with a greater amount of equity in their property, giving them the opportunity to expand their portfolio by borrowing against that equity.

Security and stability

Put simply, people will always need a place to live. For the most part, rental properties are in consistent demand.

While the housing market isn’t immune to ups and downs, it tends to be less impacted by market volatility and, thanks to rental income, is more likely to yield fixed returns.

This arguably makes real estate in general a secure and stable investment vehicle when compared to other popular options.

Positive cash flow

Given the ongoing demand for housing, investment properties typically provide a steady stream of passive income.

The rent an investor receives can even be greater than their loan repayments and maintenance costs, leaving them with positive cash flow

Access to tax benefits

Residential rental property owners can claim tax deductions if the rent brought in by a property doesn't cover the cost of owning it.

These deductions might allow them to maximise their return on investment.

Many expenses incurred in the day-to-day management and maintenance of a rental property can even be claimed against your other income, reducing the overall tax you pay.

This strategy is commonly referred to as negative gearing.

Physical asset

Many property investors report feeling more comfortable owning a tangible asset – something they can touch and see – rather than an investment that exists on a digital platform or a piece of paper.

Easy to understand

You don’t require specialist knowledge to buy, own, and manage an investment property.

That’s arguably unlike other markets, such as the share market or the cryptocurrency market. Though, if you’re keen to purchase other asset classes, there’s plenty of information out there to assist you.

Looking for a competitive investment home loan? Check out these deals

The home loan an investor chooses can make or break their wealth-building journey. Here are some of the lowest-rate investment home loans on the market right now.

Drawbacks of investing in property

Lack of liquidity

Investing in property will not give you quick access to cash should you ever need it.

Unlike stocks, it can take a long time to sell a property. And once it sells, it will take even more time for you to receive the returns of the sale. Simply put, an investment in property might not be the best if you ever need cash in an emergency.

You'll also need to sell the property entirely to free up funds, even if you only need part of its value in cash. Though, in such a case, it could be worth considering refinancing as a means to access funds before selling up.

High entry cost

One of the biggest hurdles hindering many Australians from investing in property is the heavy cost of entry, which often demands external financing.

A deposit on a property can be tens or hundreds of thousands of dollars.

On top of that, there are hefty transaction costs associated with buying property, including stamp duty, legal expenses, and loan fees.

Ongoing costs

As well as the big upfront cost of purchasing an investment property, there are a raft of ongoing expenses.

These include mortgage repayments, council rates, maintenance and renovation expenses, insurance, and perhaps body corporate fees.

A would-be investor must ensure they have a long-term investment strategy that allows them to afford more than just their investment loan repayments.

Bad tenants

Dealing with bad tenants can be a nightmare.

Not only do bad tenants cause emotional stress, but their actions can result in financial losses too, especially if they regularly fail to pay rent or cause damage to your property.

What makes a good investment property?

Weighing up whether or not to buy an investment property? There are a number of factors that can make or break you as a property investor.

Careful research, planning, and stringent due diligence are crucial when searching for the right investment property. Here are six key considerations to keep an eye out for:

1. Location

As with all property purchases, location, location, location should be your number one priority.

Where your investment property is situated can have a major impact on its rental demand, tenant quality, and rate of return.

If the property is in a high-growth market, there’s a good chance the rent it brings in will increase along with its value.

Some indicators that an area is high growth include a large and increasing population, proximity to public amenities, a vibrant job market, good school zones, low crime rate, accessibility to public transport, affordable insurance rates, and lifestyle factors such shops, cafes, and restaurants.

2. Type of property

Although property type can be determined by budget, you should also think about it in the context of the location you’re looking in.

A standalone house with a backyard will probably appeal more to tenants looking to live in a family-friendly area, while apartments might be more in demand in locations that attract young people, such as in inner-cities or around universities.

3. Condition of the property

When selecting a property to invest in, it’s recommended you conduct a thorough home inspection to determine if the property is in sturdy condition and ready to accommodate tenants.

Repair and maintenance expenses can eat into investment returns and majorly impact cash flow.

4. Number of listings and vacancies

An area with a fewer listings and vacancies can be a sign of a strong property and rental market.

Low vacancy rates can also be a contributor to rental demand, giving landlords more leeway to raise rents to boost their investment returns.

5. Positive cash flow

Depending on what your prime investment motivation is (more on that below), an investment property should (or eventually be able to) generate a positive cash flow.

This means the income a property generates is more than enough to cover what it costs an investor to own the property, also known as positive gearing.

6. Potential for capital growth

As well as cash flow, a good investment should be able to generate a profit when its owner eventually sells.

If a property’s value rises over the period in which a person owns it, that rise is known as capital growth. When that person sells, they would then realise a capital gain – meaning they sold their property for more than they paid for it.

Of course, the opposite can happen and an investor can experience a capital loss.

Highest yield areas for investment properties

Some property experts advise the key to finding high-yield investment properties is to look for areas that have both affordable property prices and relatively high rental returns. It’s common for these locations to be outside major capital cities which generally have more expensive housing and lower yields – although that may not always be the case.

Property prices and rental yields can change due to many factors including general economic conditions, seasonal considerations, and employment opportunities. Australian mining towns can be subject to huge swings in median property prices and rental yields depending on the cycles of the commodity markets they service, for instance.

Many a regional property investor has been stung by investing during peak times and selling during troughs, when prospective renters have left town.

According to Your Investment Property, here are the top three suburbs in each state with the best rental yields (as at May 2024):

State/Territory	Suburb (House/Units)	Median Price	Gross Rental Yield
New South Wales	Merrylands West (U)	$496,000	5.66%
	Tweed Heads West (U)	$510,000	5.52%
	Albury (U)	$450,000	5.27%
Victoria	Dandenong (U)	$450,000	5.25%
	Drouin (U)	$442,000	4.85%
	Warragul (U)	$432,000	4.75%
Queensland	Ashmore (U)	$620,000	6.32%
	Trinity Beach (U)	$385,000	6.08%
	Nerang (U)	$524,000	6.05%
Northern Territory	Darwin City (U)	$430,000	7.65%
	Malak (U)	-	7.95%
	Parap (U)	$380,750	7.45%
South Australia	Lightsview (U)	$460,500	5.33%
	St Clair (U)	$512,000	5.3%
	Ascot Park (U)	$482,500	5.24%
Western Australia	Perth (U)	$450,000	7.19%
	Bunbury (U)	$438,000	6.93%
	Success (U)	$357,000	6.71%
ACT	Gungahlin (U)	$452,000	6.04%
	Phillip (U)	$535,000	5.63%
	Belconnen (U)	$480,000	5.56%
Tasmania	Glenorchy (U)	$440,000	5.42%
	Bicheno (U)	-	5.44%
	Claremont (U)	$437,500	5.13%

 Source: CoreLogic. Median house price data for the period ending March 2024 based on sales transactions over 12 months. No median price denotes low sales that may skew median. Rental yield data as at May 2024.

Should I buy an investment property?

To answer this, you’ll need to work out what your prime investment strategy is.

There are generally three key areas that investors target: capital growth, rental income, and tax benefits.

These can work in combination, but you should understand which is your main motivator.

Let’s consider each of them:

Capital growth

Put simply, capital growth is the increase in value of your investment property over time.

For example, if you purchase the property for $500,000 and sell it for $850,000 10 years later, you would have achieved $350,000 in capital growth.

This strategy best suits long-term investors who intend to hold the property over time. Investors looking for good long-term growth may choose to purchase a property in an in-demand area that’s shown reliable growth over time, even if the purchase price is relatively high and the rental income may not cover the cost of owning it in the interim.

Tax benefits associated with the loss of holding the property may also be a factor in this strategy.

Rental yield and income

For some investors, their main goal is to buy an investment property that attracts enough passive income to cover all the costs associated with owning it.

If this is your strategy, research is key. You’ll need to identify a property where the get-in costs are lower and the rental receipts are comparatively high.

Bear in mind, though, you’ll need to have enough funds to cover instances in which you don’t have tenants or rental income from the property.

Tax benefits

Investors also need to consider any tax implications of owning their investment properties.

Any income your investment property generates will be added to your taxable income, while any losses you make on the property may be claimable as tax deductions, thereby reducing your overall taxation expense.

Some property investors may choose to invest in properties that don’t cover their costs, with the short-term aim of reducing their taxable income and the long-term goal of achieving capital growth. Their hope is that eventual capital growth makes up for their losses along the way.

I’ve you’re considering investing in property for tax purposes, it’s best to consult an accountant or tax professional to advise you on the implications and devise a strategy that will suit your individual circumstances and investment goals.

This could also help you decide what property is best for you and give you a better idea of how viable an investment property will be for you over the short, medium, and long term.

Your Mortgage’s Can I afford an investment property? calculator can give you an estimate of the income, expenses, and tax implications associated with owning an investment property.

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