Let’s say you have $200,000 to invest: How do you spend it? Real estate or stocks?
You might be on a quest for financial freedom, or you might want to retire early. No matter your goal, what you should invest your money in isn’t an easy answer. We think a property is a straightforward way to go, but luckily, both property and stocks have a proven track record of historical returns and low risk, which you can look at before deciding what’s best for you.
In this article, we break down the benefits of investing in property as opposed to stocks, give a comparison of their respective historical returns and risks, as well as some other things you should keep in mind. That way, you’ll know whether you want to join over 2 million other Australian investors who already own a rental property or if you should invest in shares.
Keep in mind that this article is not financial advice. It would help if you always spoke to a qualified financial advisor about your specific situation before deciding.
7 Reasons why you should invest in property
We’ll admit that we’re a bit biased here, but investing in property is a fantastic gateway to unlocking value and financial freedom for yourself, with minimal risk.
Here are seven reasons why we think investing in property is the better option.
1. Tax benefits
There’s no question; one of the significant benefits of investing in residential property is that even if the rental income doesn’t cover all of the expenses, there’s still a tax concession to take the edge off. This makes the tax benefits of investing in property a considerable allure.
When it’s the end of the financial year, everything you’ve had to pay out of pocket, like loan repayments, council rates, and utilities – all that can be used to offset your taxable income.
2. Capital growth
The great thing about real estate, especially in Australia, is that it’s very likely to rise in value as long as you have patience. The Australian property market has exploded by 412% in the last 25 years and is growing.
A common myth these days is that “a property will double in value every ten years”. Of course, this does happen, but you’ll likely be disappointed if you enter the property market with those expectations. Still, earnings are substantial given time, which is part of the reason why getting a loan for a home is relatively easy since it’s considered a very safe investment by banks.
What’s better is that when you have a strategy of spending time in the market, any time is pretty much a good time to invest as long as your financials allow it. Always remember that time in the market beats timing the market.
3. Retire early
One of the benefits of investment property is that it’s possible to live out the dream of quitting your job and living off your rental returns. If you own multiple properties, you can accumulate a sizable monthly income to live off of.
Roughly speaking, you’ll have to own $3 million worth of real estate to have an after-tax stream of $75,000 a year. You could buy a larger value property, hold it, then sell it years down the line and live off the capital gain. But, planning is critical when it comes to retirement planning, and this isn’t the safest option.
You’ve got to track a few things:
- How long it will take to pay off your mortgage (this will tremendously open up your cash flow)
- How long it will take house prices to rise the amount you want them to
4. You can hire a property manager to take the hassle out of it
A perk of investing in property is that it doesn’t take up much of your time if you hire a property manager. You can leave the hands-on stuff like setting up inspections, vetting potential tenants, and following up rent to a professional for a relatively low price at a few hundred bucks per month at most.
The only thing is that property managers vary a great deal in their quality of service. Please read our guide for finding a good property manager before you hire someone.
5. Passive Income
Another benefit of investment property is that you can turn it into an additional income stream. If you choose to gear your property positively, then you’ll be looking at pocketing extra cash each month without having to do much at all.
An additional stream of income goes a long way in feeling more financially accessible.
6. Leveraging your equity
Once you’ve got one investment property under your belt, expanding your portfolio becomes more accessible and more manageable when using this simple tactic: leverage.
Say your first investment property has risen in value, meaning you have more equity. You can then refinance the property and use your new equity pool as a deposit on another investment property. It’s a great way to get around the ordeal of scrimping and saving for a down payment.
7. You can increase its worth
Another reason to buy an investment property over something like stocks is that you can have a personal hand in increasing the value of your investment.
You can bump up your property’s worth in all sorts of ways.
- A new paint job
- Changing tired floors
- Kitchen or bathroom renovations
- Building a granny flat
- and more.
How much does it cost to invest in real estate?
A significant drawback to investing in property is that it comes with a lot of associated costs along the way, both in the process of buying and selling and just owning and maintaining an investment property. This makes it harder to save up compared to stocks.
It can be easy to look at the purchase price of a property and forget about all the other not-so-obvious costs that come with it. Some of the upfront costs you’ll have to pay on a property worth around $1,000,000 are:
- Valuation fee: $300
- Stamp duty: $42,000
- Legal fees: $100
- Lenders mortgage insurance: $20,000
- Loan fee: $700
Say you’ve done the research, bought the investment property of your dreams and filled it with tenants. What’s next? Well, the holding costs, of course. If you’re going to make your investment a lucrative success, you’ll have to take care of the ongoing expenses. You can expect you pay:
- Mortgage repayments (apprx. $3845/month, borrowing 80% on a $1million property at 3.1% interest)
- Electricity: $1627 p.a.
- Water: $984 p.a.
- Gas: $904 p.a.
- Home insurance: $1117
- Council rates: $708
- Maintenance: Using the 1% rule, operating costs should equal 1% of your property’s value each year.
- Property manager: 5%-11% of your weekly rent
These numbers are NSW averages. The price in your state might vary slightly but should still be around these prices.
The verdict: Is it worth investing in property?
If you’re after early retirement or financial security in the long term, then yes, real estate is a very wise investment. The high up-front costs can be challenging, but it’s a very secure investment that comes with a range of benefits like easy access to property finance, tax benefits, and more.
If you’ve got money to invest, them buying a property and hiring a property manager to hold it for 7-10 years is a great way to go, but stocks have their merit as well for being less capital intensive.
How Do Infrastructure Developments Determine the Success of Your Property Investment?
Successful property investors think like their tenants.
So, let’s do just that. What do you look for in a property you want to live in? You’re likely on the hunt for spots close to public transport, local schools, boutique shops, cozy cafes and lush parts.
It’s the same for your tenants.
The secret to uncovering the best places to buy an investment property in Australia is to look for suburbs with plenty of existing infrastructure. It’s also worth researching emerging suburbs slated for upcoming infrastructure developments with high-growth potential for investors.
We chatted with Domenic Nesci, Co-Founder of Wealthy, to bring you a series all about how to grow your real estate investing portfolio.
To help you put this knowledge into action, we’ve shared a bank of recommended resources at the end of this blog to help you research current and future infrastructure developments in your local markets.
How to determine if an area offers high growth potential
Generating strong rental returns is what will help you build your investment property portfolio. The key to this is too narrowly select properties in high growth areas.
But what makes a property grow?
The clue lies in a suburb’s infrastructure. The better connected and serviced an area is, the higher the demand among tenants (which ultimately drives up how much you can charge in rent).
But the thing is, existing infrastructure is not everything. It would help if you also considered the future and what is going to be built.
Let’s walk you through the two steps you need to take to determine an area’s growth potential.
Step 1. Research existing infrastructure
First up, you need to check out the current infrastructure in the area as this will influence demand (and, in turn, how much you can charge) for rental properties. As we mentioned, tenants are looking for well-connected properties that offer easy access to local amenities.
If you’re wondering how to research the property market to identify existing infrastructure, ask yourself how well the rental property does in terms of:
- Education: proximity to primary and high schools will be a high priority for young families, while access to universities will be essential for young adults and couples.
- Health care: consider how accessible the property is to local pharmacies, GPs, physios and even how long it will take to travel to the nearest hospital.
- Employment: Domenic recommends investors assess how easy it is for people to get to and from work, including commute times, congestion levels and how streamlined the journey would be (for example, are multiple forms of transportation needed to get from A to B?).
- Transport networks: in a similar vein, easy access to public transport will be a significant drawcard for tenants (especially if the nearest bus, train or ferry station is a short walk from their front door).
- Lifestyle amenities: the best investment property locations will be near cafes, bars and restaurants to local shops, parks and fitness centres.
Those are the most reliable indicators of demand in a suburb. That being said, we’ll share a little known trick of the trade.
“What we like to do is pay attention to Bunnings, Woolies, and the bigger institutional companies that rely upon population data. They can see where there will be growth centres because they need certain population controls or the number of people to be there for that store to succeed or be active or run. That’s a clever tick to tell where there is growth.”
Domenic Nesci, Co-Founder of Wealthy
Step 2. Research upcoming developments
But, savvy investors don’t wait to purchase in established suburbs. Instead, they buy properties tipped for growth before the growth happens. It sounds simple, yet so many still get it wrong.
“The government has a responsibility to its citizens to create enough infrastructure to support jobs, healthcare, education, and then also accessibility to those things.”
So you know that eventually, a suburb tipped for growth will get more developed.
By identifying areas slated for development, you uncover one of your area’s best investment property locations. That’s your sign to get in early and capitalise on a splendid growth opportunity.
The developments to watch include:
- New transport links and roads: these are managed by local and state governments, and reports detailing any planned transport improvements can easily be downloaded from their websites.
- New educational developments include proposed university and school campuses and can be accessed via CoreLogic’s Cordell Connect database.
- New industrial parks: these are hubs of employment that can indicate a growth in job opportunities (and, therefore, a rise in demand). Again, head to CoreLogic’s Cordell Connect database to research what proposed industrial parks are planned for the suburbs you’re thinking of investing in.
“If you can point to two or three other developments that will change people’s lives, then you can say with a certain level of confidence that this area is going to improve. People will want to pay more rent or pay more to purchase that property.”
By researching the area and understanding what projects are on the horizon, you can use these developments as key selling points to charge a premium for rent.
How do new developments impact the price and demand for a property?
The postal code isn’t what makes a hot property in the eyes of tenants. Instead, it’s the local developments and amenities in the area that matter and makes the suburb more attractive.
So, it’s no surprise that demand and prices increase in locations with new developments and infrastructure.
You can use this property investing tip to your advantage. By searching for rental properties in well-connected suburbs boasting plenty of schools, shops, and job opportunities, you’ll attract a wider pool of tenants and be able to charge a higher rent price, too.
“If you’ve got your finger on the pulse and you can see where developments are going, these longer-term trends become much easier for you to identify and predict.”
Should you consider buying off-the-plan developments?
The decision between purchasing an established or off-the-plan property is essential for investors as it can leave you vulnerable to significant losses. If you buy off-the-plan when you shouldn’t, you risk putting your financial security in jeopardy.
That’s because not all off-the-plan developments are built in well-serviced suburbs. Plus, the high costs of the build and the potential for oversupply can decrease your returns and lower the potential for capital growth.
Let’s look at both sides of the equation to see if off-the-plan is the right move for you.
The pros of buying off-the-plan
For investors looking for a set-and-forget investment that requires minimal maintenance or repairs, an off-the-plan property may be the right choice.
With brand new fittings and fixtures, investors often opt for these properties to secure high-quality tenants who have the disposable income to spend a premium on a rental.
The main benefits of investing in an off-the-plan property include:
- Tax advantages: by engaging a quantity surveyor upon settlement, you’ll be able to create a full depreciation schedule that allows you to easily claim tax deductions on your property’s fittings and fixtures at your next tax return (and potentially lower your tax bill).
- A good option for passive investors: if you don’t want to spend time renovating an investment property or conducting maintenance and repairs, an off-the-plan property can be an easy turn-key option to unlock a passive stream of rental income.
- An easy option for a second investment property: investors are looking to build their real estate investing portfolio enjoy the benefits of a brand-new property that allows them to generate high rental yields with a minimal investment of time or effort.
- Minimal repairs: a brand new design and fit-out mean you can save big on the time, energy and costs of conducting maintenance and repairs (often the case of older, established properties).
- Potential for rising property values: if you purchase an off-the-plan property at the right time, your investment may increase in value and result in a capital gain when it comes time to sell.
- Stamp duty concessions: one of the biggest drawcards of buying off-the-plan is the appeal of significant stamp duty savings. Different offer-the-plan benefits apply in each state, so head to your state government’s website to check what waivers you can access.
Domenic says the combination of tax benefits, minimal repairs and brand-new design make off-the-plan properties a good fit for passive investors looking to grow their property portfolio.
“Why not start with a good quality brand new asset? You’ll get a good depreciation, and you can use that to go and buy your second or third or your fourth investment property,” tells Domenic.
The cons of buying off-the-plan
On the flip side, purchasing an off-the-plan investment property does come with additional costs that many first-time investors might struggle to meet.
Some potential drawbacks to consider include:
- Paying a premium: Domenic explains the off-the-plan properties can be more expensive as you’re buying a brand-new, premium designed property. Plus, if you’re purchasing an apartment, you may also be hit with higher strata fees to cover the costs of maintaining this brand new complex.
- Construction delays: in some cases, it may take longer for the construction to be completed than initially planned. These delays cost investors (like you) rental income and can slow down your journey to building a successful property portfolio.
- Potential for oversupply: if other residential complexes are built in the area after you’ve bought in, the value of your property may decrease as there’s more supply than demand.
If you’re willing to make a higher initial investment and accept the risks of other developments impacting prices, an off-the-plan property may still serve your investment goals.
However, it’s essential to do your research into planned constructions and other off-the-plan developments in the area before buying in to ensure you’re not spending too much on your investment property.
Your resource list for researching the current and future infrastructure developments
To help inform your next investment decision, here are three reliable infrastructure and development data sources in the suburbs across Australia.
For identifying upcoming developments
You’ll need to pay to access their database, but Cordell Connect offers investors a helpful insight into upcoming residential, commercial and industrial developments in different suburbs.
From childcare centres to new apartment complexes, these reports will help you scope out emerging investment opportunities and ensure your next move is an informed one.
For reliable suburb reports: CoreLogic
CoreLogic’s data is a go-to for savvy investors to get a handle on property yields and market conditions in critical areas.
Again, you’ll need to pay to access this platform, but you’ll benefit from property and suburb profiles that reveal property values and estimated rental yields in capital cities across Australia.
For planned community infrastructure
For a snapshot of how much the Federal government is planning to spend on infrastructure over the next ten years, you can head to their summary of the 2021-22 budget. This is where you’ll find similar info any other year as well.
Here, you’ll also find a state-by-state breakdown of upcoming projects over the next 12 months, including road improvements, new public transportation routes and more.
When it comes to determining the success of your property investment, researching upcoming infrastructure developments needs to be at the top of your plan. Proposed actions have a significant role to play in supply and demand and the income and capital growth opportunities of an investment property.
By selecting a rental in Australia’s best growth suburbs near new infrastructure, you’ll attract high-quality tenants, be able to charge a premium for rent and generate passive income to grow your portfolio faster.