Investing In Real Estate
Posted on:
Raffi Pailagian
MBA, BSc, DipFP
Financial Planner / Managing Partner
Investing In Real Estate
Safe as houses is a popular saying and in Australia this has proved very true. The real estate market is generally predictably positive. But if you are going to invest in real estate, there are a few key things to consider.
The History Of Real Estate In Australia
Over the last 30 years, house prices in Australia have increased by an average of 7.25% per year[i], and in the past year prices have increased by between 20 and 25%[ii].
While this is a simplistic view of the situation, it clearly shows that real estate is, in this country, a reliably solid investment if you choose wisely, finance smartly and are prepared to remain in the market long-term.
In It For The Long Haul?
If you are thinking of investing in bricks and mortar there are high entry and exist costs. In order to offset those costs, except in periods of extremely high growth, it’s wise to consider real estate a long-term investment. That is, you should plan to retain the asset for three or more years.
Location, Location, Location
When thinking about investing in real estate, the number one rule is location.
Whether you are buying a unit, a house or a commercial property, the location will have a significant impact the rental yield, the capital growth, and the ease with which you can sell the property when you choose to do so.
Funding Your Investment
There are a couple of ways you can finance an investment in real estate.
Standard Mortgage – by this we mean you repay both principal and interest with each mortgage payment. Whilst the repayments on this type of mortgage are higher than Interest Only, it is likely the interest rate will be lower, and you will be building equity in the investment from the outset.
Interest Only Mortgage – with this mortgage you are repaying interest only, so the amount you borrowed remains constant. Bear in mind Interest Only options generally have a fairly short, fixed term of around five years, so you should have a plan in place for what happens when your repayments revert to the higher Principal and Interest payment amount. The good thing about these loans is you can claim higher deductions on investment properties, and the amount you are paying in the beginning is low, which can be of benefit if you have short-term cash flow issues or are planning on restructuring your investments before the Interest Only time is up. The cons are you will not build equity in your investment above the capital growth, and you are likely to pay a higher interest rate with these loans.
A key point to remember when taking out finance is that interest rates will go up and down. Right now they are at an all time low. But that can’t last forever, so work out your budget on a higher rate of interest than you will be paying at first to ensure you are not put in a position where you have to sell if rates increase. Check out our article on Mortgages for more information on the options available to you.
When To Buy
The simple answer is now. Real Estate, particularly in the Sydney market, almost never retracts in value. Growth may slow, and occasionally there may be a short-term correction, but since real estate is considered a long term investment, those corrections are unlikely to mean you will lose money on your investment.
That said, if you are looking to buy outside the Sydney market, do your research. Markets that rely on particular industries, like WA, which relies on mining for example, have been known to retract when the industry supporting the growth fails.
If you are considering investing in real estate, Manly Financial Services has the knowledge and experience to help you determine where this might fit in your overall financial strategy, and help you find the right finance for your individual circumstances. Call us on (02) 9976 3388 or contact us via the below link.
