Investing in the property market may not look that attractive at the moment with interest rates continuing to rise, however, bricks and mortar are still a sound investment and worth considering for your investment portfolio.
The Australian Bureau of Statistics (ABS) House Price Index shows house prices in the March 2010 quarter increased by 4.8 per cent due largely to the higher house price increases in Sydney and Melbourne. Further, rental income from the property market remains healthy given that Australians have experienced seven interest rate rises since October 2009. As a property investor, you should consider the following features:
With a market being buoyed by investors up-trading to their second or third properties, ‘location, location, location’ is still critical. Investors should strongly consider selecting properties within close proximity to a major city CBD. Residents living in the city area are generally professionals or highly skilled, and therefore as tenants are likely to have high disposable incomes and can afford higher rents, making them less risky for the investor.
With all of Australia’s capital cities served by a wide variety of public transport, including trains, buses, ferries, monorail, light rail and trams, there’s little point in investing in an area which lacks transport facilities. Renters generally need access to buses and/or trains mainly for commuting reasons, so it makes sense when looking at new residential housing developments to view plans for proposed transport routes.
Each capital city has its own, unique positive attributes and these are often critical to making an investment decision.
With the increasing popularity of cycling, and many councils building cycling infrastructure within CBD areas, it’s certainly worth also looking at cycling plans for the future.
Each capital city has its own, unique positive attributes and these are often critical to making an investment decision. Melbourne, for example, is renowned for its culture and restaurants; Sydney, its harbour and beaches; Brisbane, its cycling network; Adelaide and Perth, their large bush land parks. However, investment decisions are easier to make on familiar turf, so think carefully before investing in unfamiliar areas.
You need to ask yourself: how much can I afford to borrow, as opposed to how much am I allowed to borrow? As an example, Mr. Jones, a property investor, borrows AUD$250,000 to purchase a AUD$300,000 property. The interest of seven per cent a year is AUD$17,500 and the weekly rent is AUD$300 or equivalent to AUD$15,600 a year.
Depreciation allowances and ongoing costs such as rates, water, insurance, maintenance and so on are AUD$2,600 a year. After expenses, income for the year will be AUD$13,000 a year which is equivalent to a rental return of 4.3 per cent. As annual interest payments are AUD$17,500, he has actually lost AUD$4,500 during the year (AUD $17,500 minus AUD $13,000 = AUD $4,500). He can reduce the tax liability on his other assessable income by the investment property’s loss. As he is on the highest marginal tax rate of 46.5 per cent, this tax deduction would reduce the real loss on the property from AUD $4,500 to AUD $2,408 (AUD $4,500 x 46.5 per cent = AUD $2092; AUD$4,500 – AUD$2092 = AUD$2408) which represents a good saving.
Making the wrong borrowing decisions can affect your return significantly, so be sure to do your research and speak to an expert before you go ahead with anything.
Sam Baxter from Investec Experien is well known in the optical industry. Sam has extensive experience in delivering tailored and innovative finance solutions to healthcare professionals. Sam can be contacted on P: (AUS) 0401 232 912 or [email protected]
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