Property Investment Australia
In reviewing this property investment guide it is important not to view it as positive or negative, it is a realistic but high level introduction to property investment Australia. It underlies the importance, in our view, of obtaining property investment advice from a financial adviser prior to making a property investment and understanding the role of that advice including its limitations.
Property Investment Australia is the investment in real property in Australia to generate net rent as income and capital gains via the potential increase in value of the property over time (noting that property can go down in value as well). It encompasses various service providers and advice providers, who support a person to invest in real property.
What is real property?
This is a legal term and includes houses, apartments, shops and substantial residential, industrial and commercial real estate. It even includes land. Most Australians when they are looking to invest in property directly, will be investing in houses and apartments, and may be shops or other small commercial property.
Other Property Investment
It is important for you to be aware that the funds that you have in your superannuation fund may also be partly invested in entities that hold real property. These entities or structures are known as Australian Real Estate Investment Trusts or A-REIT, and these entities or structures may be listed on the Australian Securities Exchange or held in non-listed entities. Part of your superannuation fund may also be invested in entities that own international real estate. Entities that invest in real estate may be listed on a securities exchange or unlisted.
The Benefits and Risks of Property Investment
When we provide our clients with property investment advice on Property Investment Australia, we will discuss the benefits and risks in more detail including undertaking financial modeling and scenario analysis. We look at how the property investment impacts your overall financial position, including cashflow and investment diversification.
The reason that a client may want to invest in property is to generate net rental and capital gains. It is important to note that in Australia, while a family home is generally exempt from land tax (subject to the Australian state or territory), a property investment will generally be subject to land tax which is a state based tax.
There are other costs such as property management fees and maintenance (and strata levies if the property is a strata apartment). Some costs such as property management fees are relatively predictable but maintenance can vary between years and increase significantly over time as structures age. We discuss interest and interest rates below.
Risk Wildcard
While the impact of climate change in any particular area is not completely known, in most places the climate will be hotter (and sometimes colder), and depending on the area perhaps wetter or drier. There are likely to be more extreme weather (both hot and cold, and, dry and wet) events causing property damage, and sea levels may rise and some properties might become more prone to flooding, and sea level rise (and water table inundation). This is an unknown factor.
At Setch, we believe that this risk is likely to become increasingly important, if scientific findings about climate change are correct. The income and value of property investments being physical assets, are likely to be more affected by climatic events. We have had strong property markets in Australia, generally over the past three decades, and that may cause people to underestimate the risks of property investment.
Insurance
Related to the point above, it is important to have insurance in place when undertaking a property investment. At Setch, we do not advise on particular general insurance products but it is important that you have insurance in place to protect you. This includes a form of property liability and insurance for the structure. For our clients, we can describe the types of insurance and include the costs in the financial modeling.
It is important for clients to be aware that an increasing number of properties are becoming uninsurable due to climate change, and the insurance premiums are increasing for some properties significantly due to increased risks.
Also, at time of claim, we have found that general insurers can be difficult and try to avoid paying the full amount of the loss. Accordingly, it is important to understand the terms of a general insurance policy, and have contingencies for losses that are not covered by general insurance policies.
Vacancy
Depending on the type of property and its location, it may be subject to vacancy, which means that there will be no tenant for a period. This will have an impact on your cashflow and a contingency needs to be planned.
Building Defects
When looking at buying a property it is important to understand that the structure may have existing or latent defects. Existing defects can be identified with a building inspection by a qualified building inspector. Latent defects may be more difficult to identify. When buying an apartment it is important to identify the builder of the building because builders have a track record of either building quality structures or defective structures.
For existing apartments that are part of a strata plan, it is important to do a strata search because that may identify problems with the building or other issues that have been identified by the owners’ corporation and its committee. There are specialist firms that undertake strata searches.
We have found that clients in making property investments without professional assistance and sometimes with assistance, have underestimated the importance of the structural integrity of the building structure. There is an assumption that building regulations, inspectors, certifiers and councils will undertake this activity, but that is not always the case.
Borrowings and Interest
After you have calculated the expected rent and expected costs with some contingencies and scenarios, the next issue to consider is borrowings and interest.
Usually, our client will not have all the funds required to purchase the property and will borrow part of the purchase proceeds. The client will need to have sufficient funds in the form of equity or available equity in another property to satisfy the bank’s loan criteria.
Interest is payable on the loan and typically the bank will require that our client starts to repay the loan principal (at least at some point). Interest is a cost of holding the property and this can vary with changes in interest rates. It is important in undertaking a property investment to have financial modeling and scenario analysis as interest rates may change and have a material impact on your cashflow and financial position.
At Setch we are here to guide you with Property Investment Australia, so contact us today for an obligation-free appointment.
We do not provide advice on particular credit products but have an important role in the process as described.
Stamp Duty and Legal Costs
When you purchase a property, you will generally be required to pay stamp duty, which is a state-based tax calculated on the value of the property (different rates as the value of the property changes). This is paid at the time of settlement of purchase, and we can provide more information on this tax, and include it in our financial modeling.
Legal costs are for the conveyance or transfer of the property from the vendor to you, and may be undertaken by a solicitor or conveyancer. There are other costs in purchasing a property for other service providers.
Property Agents and Property Brokers
Property agents and property brokers are people who are in the business of selling property for vendors. They are independent contractors to the vendor, although there is a growing number of buyers agents that represent the buyer.
Financial Projections and Scenario Analysis
It is important to note that financial projections and scenario analysis undertaken for any investment or portfolio evaluation, will differ from the actual results. That is, when a financial model including scenario analysis is done for a portfolio or property investment, the actual results will differ. So why do we do projections and scenario analysis? To improve decision-making, identify expenses, risks and revenue and capital value variations, and planning.
The role of the Financial Advisor
The financial advisor or financial planner, provides property investment advice to you, which is a professional role in which the financial aspects of your property investment are evaluated. At Setch we advise our clients when making property investments by providing financial modeling and scenario analysis.
It is important to understand that property investment similar to any investment involves risk and there is always an unknown factor. We try to identify those factors to build contingencies, as it is likely that the actual results will vary from the expected results at time of investment significantly. However, given the significance of a property investment to your future financial position it is important to have financial advice in undertaking a property investment.
At Setch we are here to guide you with Property Investment Australia, so contact us today for an obligation-free appointment.
FAQs
What is property investment?
Property investment usually refers to clients directly buying real property such as houses and apartments, and sometimes small commercial real estate.
How do I finance a property investment?
You can finance your property investment from your savings, borrowing against the property investment itself, and releasing equity in other investments or your family home.
What are the risks associated with property investment?
There are many risks associated with property investment, some of which have been identified in our property investment guide. As property investment is one of the most important financial decisions that you make in your life, it is important to have professional assistance.
Why should I use a property investment advisor?
The term property investment advisor means different things to different people. Where a financial adviser is your property investment advisor, the limitations of their advice should be projections and scenario analysis, to ascertain the holistic impact of the property investment on your financial position and cashflow. A property investment advisor sometimes refers to a buyer’s agent and that person can help you find a property meeting your criteria.
How can the Setch Group help YOU?
Setch is a financial advice and planning practice and we can guide you through your property investment. We provide our experience to assist you with the financial aspects of your property investment including the identification and quantification of risks, and providing projections and scenario analysis. Our role is to understand and discuss with you the impact on your financial situation holistically including cashflow.