Pros, cons and tips for investing in Australian real estate

Real estate investing is a popular wealth creation strategy in Australia, and for good reason. Real estate typically appreciates in value, can provide immediate cash flow, and also offers unique tax benefits. But investing in the property market doesn’t come without risks.

As expert financial planners in the Southern Highlands, many of our clients seek to include property investment in their long-term financial plans. While it’s essential to speak with a professional before taking action, this article will give you an overview of real estate investing so you can decide whether it’s a good fit for you.

The advantages of investing in real estate

In Australia, real estate investment is very popular. A whopping 30% of the 11 million residential properties are considered investments. So what makes real estate such a widespread choice? Here are the main benefits of investing in real estate:

An investment property may reduce your annual tax bill

Investing in real estate has a number of tax benefits. For example, you can claim depreciation deductions for any property you own, as well as its fixtures and fittings. This means that as the property gets older, you can legally offset a portion of your taxable income based on its estimated depreciation.

Real estate typically appreciates in value

While prices fluctuate from year to year, historically property values in Australia have gone one way – up. In fact, since 1992, dwelling values have increased 382%, an average annual increase of 5.4%.

Property is a physical asset

Unlike other asset classes such as shares or cryptocurrency, real estate provides the peace of mind that comes from owning a tangible asset. For many people, the ability to touch, see, and physically manage an investment can instil a sense of security and control.

You can earn an additional income stream

Real estate investments can generate a steady income stream through rental payments, offering positive cash flow. This income can be used to offset mortgage payments, cover maintenance costs, and contribute to your overall financial well-being.

The disadvantages of investing in real estate

Real estate can be a profitable investment, but it does have drawbacks. Here are the main disadvantages of real estate investing:

The lack of liquidity

Property is an expensive asset, which means it takes longer to sell than shares or bonds. You have to clean, take photos, list the property, conduct inspections and negotiate with buyers. From the day photos are taken, most properties take around 30 days to sell, and a further 30-120 days for settlement.

Properties are expensive

The upfront costs of purchasing a property, including the down payment, closing costs, and potential renovation expenses, can be substantial. The high entry cost means you’ll need to take out a loan from a bank or financial institution, incurring additional fees and interest payments.

Managing tenants can be challenging

As a landlord, you’re responsible for collecting rent, maintaining the property and addressing tenant concerns. This requires a substantial amount of time and effort. While hiring a property manager can make things easier, not all investors are prepared for the responsibilities associated with being a landlord.

Four tips to find a suitable investment property

If you decide to purchase real estate, the specific property you buy will go a long way to determining your investment’s success. Here are four tips to help you find the right property:

1. Focus on the location. Research areas with growth potential and amenities attractive to renters. Seek neighbourhoods with low vacancy rates, and close proximity to schools, public transport and shopping centres, as a property’s location significantly impacts its long-term value and rental potential.
   
   
2. Do your research. Keep up to date with market trends and property values in your chosen area. Monitor recent sales data, rental yields, and upcoming developments that may influence property values. This awareness of market dynamics will help you make informed decisions and find properties with untapped growth potential.
   
   
3. Assess the property’s condition. Thoroughly inspect the property for potential renovation costs. Identify hidden issues that may impact its value. Consider factors like age, structural integrity, and the need for repairs or upgrades to align your investment with financial goals.
   
   
4. Seek professional advice. Hire a team of professionals to avoid mistakes and ensure your investment is a success. This could include a financial advisor to incorporate real estate into your overall financial plan, a conveyancer to ensure a smooth settlement process, a real estate agent for market insights and a property manager to find a tenant and ensure upkeep of the property.

What are real estate investment trusts (REITs)?

Real estate investment trusts, or REITs, provide an alternative way to invest in property to direct ownership. In a REIT, you pool funds with other investors to purchase a diversified portfolio of properties, which is managed by trustees or a board of directors.

REITs typically focus on specific property types, such as residential, commercial, or industrial, allowing you to diversify your real estate portfolio without having to become the sole owner of multiple properties.

In Australia, REITs are publicly traded on the stock exchange, meaning they are highly liquid and can be sold and bought more easily than a single property. Another benefit of REITs is that they offer a way to participate in the real estate market without the responsibilities of property management.

Like any investment, REITs come with their own set of risks. Market fluctuations can impact the value of REIT shares, so they tend to be more volatile than directly investing in real property. Additionally, while REITs provide liquidity, they lack the tangible aspect of property ownership many investors find appealing.

How a financial planner can help you invest in real estate

Property investment can be a successful tool for growing your wealth, but it should be considered one part of an overall plan rather than a single solution. As we’ve touched on above, there are numerous ways to get started in real estate investment. Before deciding the right option for you, it’s important to assess your financial goals and risk tolerance.

Consulting with a knowledgeable financial planner such as Poole Advisory can help you make an informed choice based on your individual circumstances. Our team can provide guidance on investment decisions based on your personal situation, and assist in creating a diversified investment portfolio that aligns with your overall financial plan and long-term goals.

Additionally, we can give you guidance on financing options, tax implications, and current market trends such as rising interest rates, to increase your chance of success. The guidance we offer can minimise the risks involved in property investing, helping you to make informed decisions and build long-term financial security that helps you unlock the lifestyle you deserve.

For more information on how Poole Advisory can help you incorporate real estate into your wealth creation plan, get in touch today or book an appointment.

Compliance Disclaimer:

This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns

Poole Advisory Pty Ltd ABN 15 642 040 604 is a Corporate Authorised Representative (No. 001282603) of Prosperitas Partners Pty Ltd ABN 30 662 654 453 AFSL 544 917