Investing in property at home and overseas - What are the risks?
Buying a property to rent out is a popular form of investment. Houses and units are easier to understand than many other forms of investments. However, they do have some issues that you need to be aware of.
• The property can be less volatile than shares or other investments
• You can earn rental income and benefit from capital growth (if your property increases in value over time)
• If you take out a loan to purchase an investment property the interest on the loan is tax deductible
• You are investing in something you can see and touch
• Rental income does not usually cover your mortgage payments or other expenses so you may have to use your regular income to cover these costs
• A jump in interest rates will affect your return and decrease your disposable income
• There may be periods of time where you don’t have a tenant and will have to cover all costs yourself
• You can’t sell off a bedroom if you need to access some cash in a hurry
• If your property investment is your major investment then you may have little or no diversification
• If the property market goes down so does your whole investment. There are many instances where people have ended up owing more than their investment property was worth; this is known as negative equity.
• There are very high entry and exit costs.
Where to buy
• Buy in a high-growth area where there is potential for capital gains. Read the newspapers regularly to pinpoint the up and coming suburbs
• Look for properties that will appeal to tenants e.g. properties with a view or are close to shops, schools and transport
• Research recent sale prices to give you an idea of what you can expect to pay for property in the same area
• Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area. This may make it harder for you to rent your property and may make it difficult to sell in the future.
• Think about changes in the suburb that will affect future prices. Things like planned developments or population changes can affect the future value of a property.
Buying, selling and managing an investment property can be costly and will affect your return. When you buy a property, you will have to pay for lots of extras on top of the purchase price. Costs may include:
• Stamp duty
• Conveyance fees
• Legal charges
• Search fees
• Pest and building reports.
As the owner, your costs may include:
• Council rates
• Water rates
• Body corporate fees
• Land tax
• Property management fees etc.
Risks with overseas property investing
Investing in overseas property is more risky than investing in property in Australia. It is much more difficult to make sure the investment suits your needs if you don’t have local knowledge and you can’t regularly inspect the property.
ASIC has received complaints about promoters who are encouraging Australians to invest in the United States property market. If you’ve been ‘invited’ to invest in a supposedly ‘cheap’ overseas property, ask yourself why they need someone in Australia to invest? Why aren’t savvy locals investing? Chances are it’s a dud investment.
Here are some things to consider if you’re thinking about investing in property overseas:
• Good tenants and good property managers are hard to find, especially when you’re removed from direct contact.
• Expensive renovations and repairs may be needed, especially if the property is in a location prone to squatters and vandalism. Buying property sites unseen is a big risk.
• You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. There are lots of hidden costs that the promoter may not tell you about.
Investing in property is a good way to grow your assets. As with other types of investments, seek professional advice before you commit.
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