Is property a “good” investment?

We frequently get asked is property a “good” investment. Our answer is often “compared to what?” This is crucial, as most investments need to serve a purpose, which could be to produce a growing income stream over time or provide a vehicle that can see your capital grow.

The right piece of real estate will always be a good investment. But not at any stage of life and not at any cost. In this piece we are going to concentrate on residential property. 

Things to consider

Is it a home for you and your family or is it an investment?

Residential property is usually either purchased as a home or for investment purposes. If it’s a home, then it may matter less when you buy, with the decision being an affordability issue. Property prices, particularly in Sydney, have risen significantly over the last 24 months, making affordability somewhat more difficult.

Some homeowners will look to supplement their retirement savings by downsizing their home and releasing equity when a larger home is not necessarily required.

Pro’s

• There is a perception that “bricks and mortar” is a safe investment. Whilst this perception is often a myth, land and property values do tend to increase over time, and can have periods of very strong growth when interest rates are low, supply of property is constrained and overseas buying is competing with domestic buying.
• In some cases, the income stream created from an investment property can be strong, and currently, where interest rates are at historical lows, the income can cover much of the costs of a loan.
• The use of borrowings can provide some tax deductions and the leverage that the borrowings provide can enhance wealth generation.

Con’s

• Current valuations are historically expensive. 
• In most circumstances, investors need to borrow money. Whilst this can enhance returns, it also adds to the risk.  
• Can you afford it? You need to consider all costs such as stamp duty, rates, land tax (if applicable), loan repayments, maintenance costs etc
• Illiquidity needs to be considered. It can be difficult to sell property quickly and at the perceived market price in the event of an emergency. 

Remember to …

If it’s an investment, don’t make it an emotional decision and don’t overpay. This can certainly impact your financial goals. Many investors get caught up in the potential tax advantages of negative gearing.

Remember that negative gearing usually means that you are losing money and this loss requires capital gains to make the investment profitable.

Often, the home purchase is more of an emotional decision, based around affordability, with capital gains an added tax-free bonus (for now anyway!!)

Property may be a great investment but make sure the time is right for you.