The basics of what to expect when investing in property…
Obviously there are two paths to property ownership, either buying a house that you will live in – which will be less of an investment decision and more of a lifestyle decision, or buying a house to rent out to someone else – which is purely an investment decision.
Like shares, property can provide a return through both the underlying value of the property increasing, and through the rental income that is paid. If you’ve purchased a home to live in, then you obviously wouldn’t be receiving any rental income.
Long term investment
The important thing to consider when it comes to property ownership, and this goes for both a place you want to live in and a place you want to rent out, is that it is a long-term investment.
Think of the fact that a mortgage is usually 25-30 years long and that gives you a basic idea of the kind of timeframe you should be looking at to hold a property. This is because of the large transaction costs involved with buying property.
I’m talking stamp duty, conveyancing, mortgage lenders insurance, loan establishment fees, the works – all of these costs don’t add any value at all to the property so you’re already behind from an investment perspective when you first purchase the house.
It’ll take some time for the capital value to increase beyond those initial costs and then you’ll be in positive territory.
Most of us borrow to buy property as purchase prices are so high, and so the interest payments on mortgages are yet another cost that needs to be factored into the cost of property ownership. For investment properties these interest payments are tax-deductible, but for a place of residence, they are not.
Most Australian’s love the idea of owning property and particularly a place they can live in, but just be sure not to jump in before you are ready because the costs are high and do take time to pay off.
Provided you go into property ownership with a long-term view though, investing in this as part of your overall strategy will be beneficial.