Is property still a good investment?

Investment properties in Australia are being hit by falling rental earnings. So is it possible to still make money from investment properties? We consider the challenges and opportunities of the current Australian property market and how to navigate both. Jumping on the investmentproperty bandwagon.

Australian investors are continuing to enter the market in large numbers, especially in Sydney and Melbourne; driven in part, by low borrowing costs and rising prices, which are both very attractive. Home loans to landlords now account for more than half of all mortgages, the highest share on record.

Increasing property prices

House prices in major Australian citiesrose 8.2% in the year through December2014, according to CoreLogic Inc – thelargest property data provider in theworld. They have climbed 12.4% inSydney (the most of all Australian cities)and 7.6% in Melbourne. So in terms ofcapital gains – in the major cities at least– property is still performing well as aninvestment.

Falling returns

The downside is that these higher pricescoincide with an increase in the supply ofhomes for lease, which is causing rentalearnings to fall.A quick snapshot across eight states andterritory capitals in October 2014 showsrental earnings dropped to 3.7% forhouses and 4.5% for apartments. That’sa drop from 4% and 4.7% a year earlier,CoreLogic figures showed. The resultis that investment properties are gettingmore expensive to buy and returning lesscash flow through rent.

Warnings

There’s been a lot of debate about the Australian ‘housing bubble’ ; the argument being that the current property market is overinflated and prices are due for a fall. Late last year, The Reserve Bank of Australia warned that the increase in investor lending might be, “a sign of speculative excess”. The implication is that investors may be paying too much and are at risk of a period of negative equity. This timed with falling rental earnings, makes investing in property look increasingly high risk in the short term.
Six tips to consider

If you are an investor or looking to invest in property, here are six things you can do to mitigate some of this risk.

1. Get some up-to-date advice. Revisit or even rethink your investment strategy by speaking to your financial adviser. Your financialgoals will determine whether property is good for you in the short and long term.

2. Take a long-term view. All types of investments go through cycles of growth and retraction – property is no different.

3. Do your research – look for hot spots. Having the right locationis key when looking to invest in property. You should be on the look out for areas that have future growth potential. These areas might not be fashionable but they make good investment sense. On top of this, you may be able to purchase an affordable property that can potentially grow in value in a short period. Also consider regional and commercial property, which at times can perform better as an investment.

4. Don’t get in over your head by borrowing too much or overcapitalising. Do the mathbetween what you need to spend on a property, the rental returns and the projected capital gains. Make sure you have a plan about how to cover the shortfall if interest rates go up.

5. Make sure you’re getting all the value you can through gearing and other tax strategies. Again speakto your financial adviser about how tomaximise these.

6. Diversify your investments. A balanced investment portfolio should include a range of asset classes, not just property. In fact property, depending on your stage of life and financial goals, may not be the best choice for you. Again, get good advice.

Odyssey Magazine – Autumn Edition

With investment properties in Australia being hit by falling rental earnings we examine if buying into Australian property is still a good investment. We also discuss how the recent Australian Tax Office (ATO) changes to assessable income rules around SMSF borrowings may impact the tax you pay. Our regular Market Update from Piers Bolger, Head of Research & Strategy at BT Financial Group, looks at the performance of overseas and local markets. Finally, we remind everyone of the importance of having insurance and ask if you and your family can afford not to be protected.

For a full version of our magazine, please click here. Until next time – happy reading.

– The Odyssey Team

It’s not just a house…

7 Reasons why you should talk to  your adviser before signing on the dotted line

 

When buying a house, it is standard to consult the help of a local real estate agent and a home loan specialist because you want expert help with one of the biggest financial decisions in your life.

Why then wouldn’t you also enlist the services of a financial adviser?

One – Although buying a house is regarded as an isolated, potentially one-off financial event (and a big one at that), it has much wider financial ramifications.

Two – That is, it impacts on cash flow and cash surpluses, insurance arrangements and estate planning – almost all of the necessary components of making a financial plan.

Three – The starting point before buying a house is a very detailed budget. This will make affordability considerations much more certain, and it will also highlight what resources you have to cover the hefty and sometimes hidden costs associated with buying a house.

Four – Given you are about to buy a significant asset, you also need to think about insurance – mortgage insurance, home and contents insurance and personal insurance. How will you cope financially if your circumstances change?

Five – And what will happen to the asset when you die? Partners must decide whether the asset will be held as joint tenants or as tenants in common. If it is the latter, a current will is essential.

Six – It’s important to realise that financial advisers assist with the big picture decisions as well as helpful tips. For example, diversifying your mortgage and spreading risk across both a fixed and variable loan. Further, make sure your loan is set up with an offset account and a redraw facility.

Seven – Finally, opening one of the government’s first home savers accounts will help you reach your savings goal faster while being taxed at a lower rate.

Contact your financial adviser to gain a broader understating of how buying your dream home fits into your financial strategy.

 

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

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This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Odyssey Financial Management is an authorised representative of Total Financial Solutions Australia Limited.