Residential property gets an upkick
AUSTRALIA'S property market is showing positive signs of growth and that's encouraging investors back into bricks and mortar.
According to comparison site RateCity, February 2013 saw the highest value of investment loans written since before the global downturn, with would-be landlords borrowing a total of $7.9 billion to fund rental property purchases.
There are several reasons why residential property is attracting fresh interest. Interest rates are low, and following the Reserve Bank's cut to the official cash rate on 8 May, a number of mortgages now offer rates at or below 5.0%.
In addition, property is returning healthy yields. Figures from research group RP Data show that nationally, houses are notching up yields of 4.2% or 4.9% for units.
Reasonable rates of capital growth are also being noted for residential property though this varies depending on location. RP Data says year on year capital growth (to 30 April 2013) was 12.4% in Darwin, 8.4% for Sydney and 8.3% in Perth. Canberra (7.6%), Brisbane (7.0%) and Adelaide (6.5%) also achieved good gains, with Melbourne (5.4%) and Hobart (3.9%) tailing the league table of price appreciation.
While the signs may be encouraging, getting it right with a rental property is not always as straightforward as it may seem. A direct investment in bricks and mortar can call for greater care, and can have more pitfalls, than other mainstream assets.
One of the key downsides is that investing in property generally involves taking on a major debt - the investment loan. Sure, the interest charged on the loan can normally be claimed as a tax deduction while the place is tenanted or available for rent. But it's worth thinking about whether you could meet the repayments if the property is vacant for any length of time or if you lose your regular wage or salary through job loss or redundancy.
Property also comes with substantial transactions costs. No matter whether you're buying or selling, there are a range of fees and charges that will eat into your capital.
Stamp duty, lender's mortgage insurance, pre-purchase inspections and legal fees all add to the purchase price of a place. When you eventually go to sell, you're likely to face agent's selling commission and marketing costs plus another bout of legal fees.
With other assets like, say, shares, the transaction costs are way lower so more of your money goes straight towards building your wealth. It's also a lot easier to get all or part of your money out of a share investment if you need cash in an emergency.
I stress that residential property can be a successful long term investment. However anyone with the money can become a landlord and if you don't choose carefully, you may find your returns are low or even negative.
That's why it's so critical to do your homework properly and make sure you buy the right property at the right price in an area with decent growth prospects. It's also worth spending some time ensuring your investment mortgage offers a competitive rate and flexible features.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.