The pros and cons of investing in property to build wealth
Investing in property could allow you to build significant wealth and secure an income stream for the future, but it's not without risk. If you're thinking about investing in property, you'll want to understand the potential limitations and drawbacks as well as the potential advantages of property investment.
- Easier to understand
Investing in residential property could be easier for some than gaining confidence in investing in the sharemarket.
- Income stream
As long as the property is tenanted, you can generate an income from the rent. This can be used to cover mortgage repayments and other costs.
- Capital growth
At the same time, your property could be passively generating wealth for you in the form of capital growth. You can tap into this equity by using it to finance another investment property, or when you sell the property and realise the capital gain.
- Tax benefits
You could offset your property expenses against your rental income. This includes the interest on the loan you used to buy the property. In addition, you can take advantage of strategies like negative gearing to minimise your tax bill.
- Leverage to buy
Lenders are usually happy to use underlying property to secure the loan, you're leveraging a 5% or 10% deposit to own a property that's worth many times more than the money you put up.
You could buy your first investment property while renting yourself and get on the property ladder earlier than expected. This means you might be able to live in the suburb you prefer while building up equity in a property you own, one that's generating rental income at the same time.
Buying and maintaining a property can be costly. You'll need to pay one-off purchase costs, maintenance, repairs, stamp duty, legal costs and building reports. You'll also need to factor in ongoing costs like mortgage repayments, council and water rates, insurance, land tax, property management fees, and body corporate fees. In addition, your rental income might not cover your mortgage repayments and other ongoing expenses.
- Dependence on tenants
If the property is vacant, you're not generating rental income. You might need to keep the property occupied for most of the time to cover a good amount of your ownership costs. In addition, nightmare tenants can lead to ongoing headaches.
- Illiquid investment
Property is considered an illiquid investment, this means you can't easily offload it to generate some cash flow like you could with shares -it can take weeks or months to sell your property.
- Hidden issues
You can have hidden issues come to light years after you've purchased the property even if you have all the right checks done on the property.
- Lack of diversification
Since property costs more to get into, some investors might have all their eggs in just one basket instead of diversifying their investment mix. Add to the scenario of sudden changes like rental vacancies and changing interest rates and you could be subject to higher risk than you might be aware of.
Investing in property is generally seen as a safer option (than investing in the sharemarket) for good reason: the underlying asset could produce rental income as well as capital gains. Get in touch today if you’d like to chat about your property investment loan needs.