Investors nailing market
PROPERTY investors are dominating the spring real estate market, accounting for almost h a l f o f t oday’s new mortgages.
The low interest rates we’re seeing are undoubtedly driving a large part of investor interest but anyone thinking of buying a rental property needs to consider a broader range of issues than cheap financing.
According to housing finance data from the Australian Bureau of Statistics, investor finance commitments accounted for 45 per cent of all new home loan dollars settled in July (excluding refinancers), ahead of upgraders (44 per cent) and firsthome buyers (11 per cent).
That’s a significant rush of investors, and while it may be making life difficult for first-home buyers, who often compete in the same lower price brackets as investors, the key issue is that some investors may not be taking a long-term outlook. And that’s critical when it comes to residential real estate.
You see, the entry and exit costs for property are high, especially compared to other asset classes such as shares. Investors face expenses such as stamp duty, legal fees and agent’s commission on the sale of a place, which usually all add up to many thousands.
In fact, you could be looking at buying costs totalling up to about 5 per cent of the property’s value, with exit costs comprising a further 3–4 per cent of the property’s sale price. It means a property may need to appreciate by as much as 9 per cent before you break even – let alone make a capital gain on the place.
It can take time for property values to rise by this much. In the meantime, interest rates are likely to change from today’s levels. Sure, they could fall further. But at some point they will also rise.
So while it makes sense to look for a property with tenant appeal in a suburb with potential for capital growth, it’s also important to crunch the numbers and check any rental property you’re considering is still a viable option if interest rates rose a few percentage points in the future.
Remember, if you take out a variable rate loan, the rate you pay could vary from month to month. Yet, as a landlord you may only be able to raise the rent once a lease has formally expired, and that could be every six or 12 months, depending on the term.
Bear in mind, too, rental properties have ongoing costs. These usually include building insurance, property management fees, council rates or strata levies, and maintenance – and, of course, unexpected repair bills.
I often hear people say, ‘‘But I can claim all these expenses as a tax deduction’’. That may be true; however, you have to pay the cost in the first place to claim the tax break.
Don’t get me wrong, a wellconsidered property can be an excellent investment. Just be sure to do your numbers carefully to decide if your finances can handle an investment property if interest rates were to rise.
Number crunch: Consider the costs and parties involved before investing.