Are you wondering if buying an investment property is right for you?
As someone who’s been around the block a few times when it comes to real estate, let me tell you that there are many reasons why investing in an investment property can be a fantastic decision for your financial future.
An investment property is a piece of real estate purchased to generate income or profit through rental income, capital appreciation, or a combination of both.
In this article, I talk you through the benefits of owning an investment property and help you understand why it can be a wise financial decision.
Passive Income
One of the main benefits of owning an investment property is the opportunity for you to earn passive income, specifically rental income.
You can go two ways about it:
- You can pay for your investment property in cash and earn your investment back through rental income
- Or you can let your tenants practically help you out with your mortgage payments through their monthly rental payment
By renting out your property, you generate a steady stream of income that can provide support and stability to your finances, and help you build long-term wealth.
Considering the rental potential of your investment property can also influence your pick of the property. Do you want to rent out to families? Single young professionals? Small businesses? The right type of investment property will help you attract the tenant and rental income you want.
Tax Benefits
Maintaining your investment property will incur some expenses, inevitably. Don’t worry, one of the advantages of owning an investment property in Australia is that our tax system supports property owners.
Getting an investment property mortgage and owning an investment property can come with a number of tax benefits, including deductions for your mortgage interest, property taxes, repairs, maintenance, and more!
These deductions can help reduce your taxable income and lessen the burden as EOFY approaches.
Appreciation
Real estate has historically and reliably appreciated over time, meaning that the value of your investment property WILL increase over time. Yes, there might be short-term drops in value but if you hang on in there with property, you’re on a winner.
We all have heard of someone purchasing their home at a prime location for $128,000 when it was still being developed in ’94 and selling it for almost two million in 2021.
Property value appreciation means you can expect a significant return on your investment if you decide to sell your property in the future.
Increased equity
From the moment you start paying your mortgage on your investment property, you build equity in your name.
Equity can be estimated by computing the difference of your property’s current market value and your remaining loan balance for your mortgage. Your equity amount is also added to your individual net worth as it signifies your ownership of your property (paid and secured).
Keep in mind that understanding equity and knowing how you want it to work for you will influence the way you plan your mortgage payments.
This equity can be used as leverage in order to qualify for home equity loans and finance future investments or to improve your financial standing. Value appreciation also affects and increases your equity.
Diversification
Investing in an investment property can help diversify your investment portfolio and reduce your overall risk, protecting you from devastating losses and ensuring that a good chunk of your investments are always working for you.
While you may feel confident with the way you handle and trade your stocks and currencies, spreading your investment across real estate options as well can provide your portfolio better stability.
It also serves as assets that protect your wealth from risks that may result from both predictable and unpredictable market activity and downturns.
This is all because real estate is generally less volatile than other types of investments, such as stocks and bonds. A pandemic or a brand scandal may sabotage some of your stocks but real estate value is almost always on a steady incline.
Inflation Hedge
Real estate investment properties can serve as an effective hedge against inflation. As inflation rises (and before you even think of making money off of your property), your fixed mortgage stays as it is, effectively giving you a growing discount as you are in the process of paying for your property.
Also as inflation increases property values, it logically follows that the income you can generate with your investment property can also increase in keeping pace with inflation and maintaining its value over time.
When hunting for an investment property, you should also consider this idea of your property options being potential inflation hedges. Multiple-family properties (e.g. an apartment building with multiple studio units) will also be advanatgeous as these properties generate multiple income streams and allow you to increase rent yearly as necessary.
Properties in prime locations that cater to business districts, university towns, or tourism hubs are also going to stay competitive even through the throes of inflation.
Forced Appreciation
With a little bit of thoughtful effort and investment, you have the capability to increase the value of your investment property through improvements and upgrades. This is also known as forced appreciation.
Taking advantage of your property’s potential through this method can result in a significant return on investment if done correctly.
Redesigning the home, beautifying the exterior through renovation, upgrading the roofing materials, modernising the water system, adding a balcony or another storey to your property, increasing curb appeal, or landscaping the lawn– these are ways you can catalyse your investment property’s value appreciation.
When looking for an investment property, location and structure integrity will be your priorities. Depending on your willingness and passion for flipping a property and how you look at it, you could benefit from investing in simple but promising ‘blank canvasses’.
Finding a simple or minimalist property can actually give you an affordable entry into owning an investment property that you can renovate and improve if you wish to increase its value through time and forced appreciation.
Retirement Income
So you have purchased a couple of investment properties in your 30-40s. And you are paying for it for the next 10-30 years. This will bear fruit for you more than you estimate, especially when it comes to planning your retirement.
Owning an investment property can provide you a retirement home and/or a reliable source of income upon retirement.
By purchasing an investment property early in your career and renting it out for many years, you can build up a significant amount of real estate equity and continue to generate sufficient passive income long after you’ve left the workforce.
