The pros and cons of buying an investment property

By Mark Rosanes

Many investors consider real estate as an attractive investment option because of the potential benefits the market can provide. If done right, investing in property can be an effective way to build wealth and secure your financial future. However, careful planning and unyielding commitment are also needed to succeed in this kind of financial endeavour.

If you are planning to buy an investment property, there are several factors you need to consider.

Is investing in property worth it?

Just like any type of investment, real estate has its own share of benefits and drawbacks. Let’s look at them one-by-one.

Why you should invest in property

1. Security and stability

All people need a place to live. That is why properties are almost always on demand. The housing market may have its ups and downs, but it tends to be less impacted by market shifts and more likely to yield fixed returns even in the current economic climate.

2. Positive cash flow

You can use your real estate investment as a rental property with the goal of generating a steady flow of passive income, especially if the income coming in is more than the monthly repayments and maintenance costs combined. You can also use your rental income to pay off mortgage and other expenses of the rental property.

3. Access to tax benefits

Residential rental property owners also enjoy a bevy of tax deductions that allow them to maximise their return of investments.

4. Long-term investment

Overtime, 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.

Drawbacks to investing in property

1. Lack of liquidity

Unlike stocks, it takes a longer time to sell property. This can put you at a disadvantage, especially if you need quick access to cash.

2. High entry cost

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

3. Ongoing costs

Investing in property requires ample planning and preparation because of the several 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.

4. 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 the property.

What makes a good investment property?

Experts say that a good property can either make or break an investor. This is the reason why careful planning and due diligence are crucial when searching for the ideal one. Here are the things you need to consider when searching for the right investment property.

1. 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 large and rising population, proximity to public amenities, vibrant job market, low crime rate, accessibility of public transportation, favourable taxes, and affordable insurance rates.

2. 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.

3. 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.

4. 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.

5. 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 return of about 8% or more.

Best 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 located outside major capital cities, which often have expensive housing and lower yields.

Your Investment Property uses the latest industry data to identify suburbs that deliver the highest yields across Australia. Here are the top suburbs in the country based on rental yield according to the property market intelligence website.

New South Wales

Suburb

Property type

Median price

Rental yield

Lightning Ridge

House

$82,500

13.87%

Boolaroo

Unit

$143,000

13.82%

Bourke

House

$100,000

13.52%

Cobar

House

$116,400

12.06%

Broken Hill

House

$124,000

11.43%

Victoria

Suburb

Property type

Median price

Rental yield

Point Lonsdale

House

$890,000

10.52%

Coleraine

House

$132,000

8.47%

Murtoa

House

$122,500

8.28%

Warracknabeal

House

$142,000

7.69%

Mortlake

House

$243,000

7.49%

Queensland

Suburb

Property type

Median price

Rental yield

Pioneer

House

$140,000

14.49%

Koongal

Unit

$90,000

13.87%

Wandoan

House

$85,000

12.24%

Blackall

House

$112,500

11.56%

Miles

Unit

$90,000

11.56%

South Australia

Suburb

Property type

Median price

Rental yield

Solomontown

House

$110,000

10.87%

Roxby Downs

Unit

$148,250

9.82%

Port Pirie West

House

$115,000            

9.50%

Crystal Brook

House

$165,000

9.14%

Port Augusta

House

$139,750

8.93%

Western Australia

Suburb

Property type

Median price

Rental yield

Kambalda East

House

$62,500

14.98%

Rangeway

House

$80,000

14.30%

South Carnarvon

House

$115,000

13.57%

Port Hedland

Unit

$173,500

13.49%

South Hedland

Unit

$150,500

12.09%

Tasmania

Suburb

Property type

Median price

Rental yield

Tullah

House

$108,500

10.06%

Zeehan

House

$122,500

9.66%

Rosebery

House

$105,000

8.91%

Queenstown

House

$115,000

8.14%

Rosebery

Unit

$86,750

7.19%

Australian Capital Region

Suburb

Property type

Median price

Rental yield

Denman Prospect

House

$540,000

8.09%

Hughes

Unit

$260,000

7.70%

Chifley

Unit

$310,000

7.63%

Curtin

Unit

$260,000

7.20%

Lyons

Unit

$285,000

7.02%

Northern Territory

Suburb

Property type

Median price

Rental yield

Tennant Creek

House

$230,000

9.38%

The Gap

Unit

$247,250

8.83%

Millner

Unit

$199,000

8.62%

Bakewell

Unit

$205,000

8.05%

Katherine South

House

$251,000

7.98%

What are the best mortgages for property investors?

If you are looking to invest in property, it pays to conduct your own research to find the best investment home loans available.  Home loans vary from lender to lender, and often the best way to determine which ones fit your needs and financial situation is by comparing interest rates, loan features, and mortgage repayment terms.

Fortunately, Your Mortgage gives you a comprehensive comparison of the best investment home loans available from Australia’s top lenders. Click here to view and compare.

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