The potential tax benefits and wealth generation make real estate an attractive investment option for many Australians, but it is not without any drawbacks.

If done right, investing in property can be an effective way to build wealth and secure your financial future. However, this endeavour needs careful planning and an unyielding commitment to ensure success.

What are the advantages of property investing?

Security and stability

All people need a place to live — therefore, properties are almost always in demand. The housing market may have its ups and downs, but it tends to be less impacted by market shifts and is more likely to yield fixed returns. This makes real estate generally a more secure and stable investment vehicle compared to others.

Positive cash flow

Given the demand for housing, an investment property can provide a steady stream of passive income, especially if the rental income is more than the monthly repayments and maintenance costs combined. You can also use your rental income to pay off the mortgage and other expenses of the rental property.

Access to tax benefits

Residential rental property owners can also enjoy tax deductions that allow them to maximise their tax return on investments. For instance, expenses incurred in the day-to-day management and maintenance of the rental property can be claimed against income, reducing your tax.

Long-term investment

Over time, the value of your investment property may go up, along with your rental income, especially if the property is in a high-yield area. This means your cash flow can also improve, leading to positive cash flow, which you can then use to expand your investment portfolio.

What are the drawbacks of investing in property?

Lack of liquidity

Investing in property will not give you quick access to cash — unlike stocks, it takes a longer time to sell a property. You cannot expect to cash in your investment if you have an immediate need for funds in case of emergency.

High entry cost

One of the biggest hurdles hindering many Australians from investing in property is the heavy financing involved. A deposit alone can cost in the tens to hundreds of thousands of dollars.

To know if you can afford one, use our investment property calculator.

Ongoing costs

Investing in property requires ample planning and preparation because of the costs involved. Mortgage repayments, council rates, maintenance and renovations expenses, and insurance are just some of the ongoing costs associated with owning a property. Because of this, it pays to have an investment strategy where the income from your property outweighs all ongoing expenses.

Bad tenants

Dealing with bad tenants can be a nightmare for landlords. Not only do bad tenants cause emotional stress, but their actions can also result in financial losses, especially if they regularly fail to pay rent or cause damage to your property.

What makes a good investment property?

Putting the advantages and disadvantages aside, certain factors can either make or break you as a property investor. Careful planning and due diligence are crucial when searching for a property, especially if it is your first one. Here are the things you need to consider when searching for the right investment property:

Location

A property’s location has a major impact on the rental demand, tenant quality, and rate of return. If the property is in a high-growth market, rental price, tenant quality, and the property’s value will likewise increase. Some good indicators of a high-growth area include a large and increasing population, proximity to public amenities, a vibrant job market, good school zones, low crime rate, accessibility to public transportation, favourable taxes, and affordable insurance rates.

Condition of the property

When selecting a property to invest in, it is advisable to conduct a thorough home inspection to know if the property is in a sturdy condition and tenant-ready, as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.

Number of listings and vacancies

An area with a low number of listings and vacancies shows a strong rental market. Low vacancy rates also allow landlords to raise rental prices to boost returns.

Positive cash flow

An investment property should be able to generate a strong positive cash flow every month. This means the income a property generates is more than enough to cover everything that an investor puts into it.

Potential for capital growth

Apart from cash flow, investors should be able to generate profit from the property. The most common metric used to determine profit is cash on return because it factors in how the investment property is being financed. Experts say a good investment property can make cash on a return of about 8% or more.

Highest yield suburbs for investment properties

Some experts say that the key to finding high-yield investment properties is to look for suburbs that have both affordable property prices and relatively high rental returns. Typically, these areas are located outside major capital cities, which often have expensive housing and lower yields.

According to Your Investment Property, here are the top three suburbs in each state with the best rental yields (updated as of March 2022):

State/Territory

Suburb (House/Units)

Median Price

Gross Rental Yield

New South Wales

 

Warren (H)

$166,250

9.4%

Sussex Inlet (U)

$505,000

9.4%

Broken Hill (H)

$150,000

9.4%

Victoria

 

Donald (H)

$166,000

7.9%

Murtoa (H)

$140,000

7.8%

Warracknabeal (H)

$180,000

7.2%

Queensland

 

Pioneer (H)

$177,500

12.3%

Collinsville (H)

$115,000

11.8%

Dysart (H)

$147,000

10.6%

Northern Territory

 

Tennant Creek (H)

$255,000

8.6%

Millner (U)

$240,000

8.5%

Karama (U)

$232,750

8.4%

South Australia

Solomontown

$127,500

9.2%

Port Augusta

$160,000

9.1%

Quorn

$167,500

9.0%

Western Australia

 

Kambalda East

$87,500

13.7%

Merredin

$155,000

10.1%

Kambalda West

$145,000

10.0%

ACT

 

Denman Prospect

$570,000

9.8%

Taylor

$500,000

7.7%

Crace

$367,000

6.8%

Tasmania

 

Queenstown

$152,000

8.5%

Zeehan

$149,500

8.0%

Strahan

$270,000

6.7%

 Source: CoreLogic. Data is reported to the period ending December 2021.

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