Of course, there are a number of issues worth weighing up before you decide whether to invest in property. Some of these are positive factors for investors, such as:
Low Barrier to Entry
Property is often seen as less of a risk compared to other investments, often because it doesn’t require any particular specialised knowledge, such as what is required in a niche market–such as NFT trading or buying and selling cryptocurrencies. It also comes with ample benefits such as capital gains, rental yield, and tax deductions, which we’ll explore below.
Capital Growth on Property
Capital growth refers to the increase in value of your property over time, which is calculated by comparing the current market value with your initial purchase price. For example, if you purchased a property for $500,000 ten years ago and it is now worth $900,000, you’ve made $400,000 in capital.
Australian property investors have traditionally enjoyed high capital gains returns. According to the latest CoreLogic Pain & Gain report, which consolidates data from approximately 76,000 resales in the quarter, 92.3% of homes made a nominal gain from resale.
While this represented a decline on previous quarters, CoreLogic Head of Research Eliza Owen was quick to point out the “gains from residential resales in Australia remain substantial overall and the rate of loss-making sales were relatively contained at a national level”.
Overall, the median gain for sellers during the quarter was $276,500 nationally.
Rental Yield
While capital growth will take years and even decades to hit your bank account, rental yield offers more immediate rewards.
Ultimately, rental yield is the difference between the income you receive from tenants minus the overall costs of your investment.
If your intentions are to rent out your property to tenants, then it is paramount that you consider the investment property’s potential rental yield.
As Lilly Schneider, an investment property advisor with Abercromby’s explains, a rental yield between 6-11% would be considered a good return for an investment.
However, rental yield will differ from state to state, and it’s worth noting that in expensive capital cities such as Sydney, yields are more likely to be closer to 3%, with capital gains the most appealing aspect of this region.
Additionally, investors may find that properties with good rental yield tend to be less expensive to purchase than those in areas promising good long-term capital gains. This means that the costs associated with a purchase, such as tax and mortgage repayments, will also be less overall.
Investment In a PhysicalAasset
For some, a major driving factor for investing in property is that it is a tangible, physical asset. Unlike shares, individuals can see their investment in its physicality. They can drive past the property whenever they like; they can fix whatever is broken.
This tangibility “provides the confidence and total control for investors, something which isn’t guaranteed when investing in the stock market”, Schnieder explains.
Tax Deductions
If you rent out your property, you can claim deductions for most of the expenses you incur in these periods.
How? Enter the negative gearing tax break. As the ATO explains, your rental property is positively geared if your deductible expenses are less than the income you earn from the property. If your deductible expenses are more–and therefore you do not make a profit from renting out your property–then it is said to be negatively geared.
It’s worth investing in a depreciation schedule, too, which will clearly outline what you can claim on your tax return each year.
Speaking with Forbes Advisor, Pina Brandi, director of PB Property, explains that the tax break for negative gearing was made available in the ’80s to boost construction and help the government accommodate Australia’s growing population.
“Australians benefit from negative gearing because the government doesn’t have resources to provide adequate volume of accommodation to the burgeoning population, let alone affordability schemes and incentives,” Brandi explains.
“By adding tax incentives for investors, [the government has created] a stimulus to investors to buy and support the construction of more dwellings. This translates into more jobs, more service providers, more opportunities and keeps the country developing.”
The capital gains tax discount is another tax incentive investors enjoy. The CGT discount was introduced by the Howard Government in 1999, and allows individual taxpayers to reduce their CGT by 50% if the asset–including property–has been owned for at least 12 months.
However, it is important to note that if the asset is your home and you first started using it for rental or business purposes less than 12 months before disposing of it, you are unable to claim the CGT discount.
