When you invest money in property, you are purchasing a physical investment, one which you hope will increase in value but also one which can provide you or others with accommodation. Because property is physical and has a practical use, many financial advisors believe that this type of investment is low-risk. However, it is important to remember that any type of investment, including property, entails a risk: property should be seen as a long-term investment, and one which could increase or decrease in value depending on market conditions. If you do decide to invest in property, there are two ways of doing so.
You can choose to purchase a property by yourself (direct investment), or invest in property funds whose value depends on the value of the property in which they invest (indirect investment). If you are interested in direct investment, you may wish to consider purchasing property abroad which you could use as holiday accommodation and rent out to others. You could also purchase 'buy-to-let' property, if you already have a family home. If you would prefer indirect investment, you will need to consider a property or real estate investment trust.
Property Investment Funds (PIFs) / Real Estate Investment Trusts (REITs)
These funds allow the average investor to invest in property via an investment portfolio which focuses on shares in properties and property developers. PIFs and REITs operate in much the same way as unit trusts and OEICs: investors' money is pooled together to enable investment in a wide range of different companies. However, these investment opportunities are generally 'closed', that is, you are not able to make regular contributions to the fund, but must purchase shares initially. The trust / fund must distribute ninety percent of the profits they make from the investment to their investors in the form of dividends (a sum of money paid to company shareholders). Although some advisors consider this type of indirect saving to be relatively low-risk, because the investment portfolio is carefully monitored and managed by investment professionals, there is inevitably risk involved in any investment. If the property market suffers a sudden decline, the price of the shares and the value of any dividends paid will also decrease.
Buy-to-Sell / Buy-to-Let Property
If you purchase a property with the intention of selling it on or renting it out, you have a higher chance of earning impressive profits than via indirect investment. If you already have a home, you may wish to purchase a property and rent it out. The rent you earn can be used to make mortgage payments and give you an investment income. At a later date when the market is favourable you can sell the property, paying off the rest of the mortgage (if necessary) and hopefully earning significant profits. If you buy a property aiming to sell it on, you will usually purchase a house or apartment which requires a substantial amount of renovation. This gives you the best chance of making good profits, because your home improvements will increase the value of the property. If you live in the property whilst you are renovating it, you will even be able to sell your home without being required to pay capital gains tax: currently charged at fifty percent. Selling a home that you have been letting out will incur capital gains tax charges.
It is possible to get a mortgage in order to finance the purchase of a buy to rent property, but the current market conditions in Australia have made banking institutions much warier of lending people money. You may find it difficult to get a good deal on a mortgage without high interest rates and heavy late payment fees. It is important to remember that any investment involves a certain amount of risk, and there is no guarantee that the housing market will increase: it can also fall rapidly, leaving investors with dwindling profits. There is also no guarantee that you will be able to find tenants, or buyers for your property when you wish. Many investors underestimate the work and cost involved in maintaining and / or renovating a property. It is important to request a few quotations from appropriate handymen before deciding to purchase a property, if only to ensure that you do not buy a home with serious structural damage. Consider also the commitment that you will have to make if you agree to act as a landlord, including regular maintenance / repairs, regular property inspections and legal costs.
Purchasing Property Abroad
Considering the high price of property in Australia, it is no surprise that overseas property purchase has increased in popularity over the last few years. Many investors are happy to purchase a second home in a warmer or cooler climate and avoid holiday accommodation costs, especially when there is a market for other holiday makers to rent their home, contributing to the running and mortgage costs and generating profits. Not all overseas property is cheap, but there are several areas where you can expect to buy a relatively inexpensive holiday home. A four bedroom luxury villa with a pool in Florida is currently on the market at US$270,000 (AUS$357,000)*, whilst a one bedroom beach apartment in Cyprus costs from just $36,500**. Many of these properties are marketed as investments, with details of expected profits and rental potential. Overseas property offers you the advantage of owning a home in another country and benefiting from free accommodation should you choose to take your holidays there. If the property is situated in a popular holiday area, you will usually have the opportunity to rent out your home to holiday makers without too much trouble. If you are uncomfortable marketing the property yourself, there are a range of holiday home agencies who specialise in letting out holiday properties in exchange for small fees.
However, it is important to remember that there might be unexpected costs which arise when buying property abroad. Often the asking price will not include local taxes, administration and legal costs and estate agency fees. If you are buying a property 'off plan', that is, a property which has not yet been built, it is important to confirm the date at which the property will be ready to use, and to be certain that the current asking price will not increase if building or labour costs are higher than the project manager expected. Similarly, it is a good idea to have at least a basic idea of the local language, and a contingency fund to pay for local administrative costs, such as registering yourself as a resident. If you have never visited the region where you plan to buy a home, you may wish to consider doing so: do not take the word of the estate agency that it is a touristy area with great local amenities. You may purchase a property which does not meet the promised specifications, and find it difficult to rent or re-sell it. If you aim to buy a property and renovate it before re-selling, you may be able to make better profits; however, you will need to consider the costs of building work and the logistics of employing and supervising local workmen, especially if you do not speak the local language and / or aim to manage the project from Australia.
