So, you’re thinking of investing in residential property.
How do you know if it’s the right type of investment for you? We weigh up some of the pros and cons.
The pros of investing in residential property
- Earn rental income. Even once tax and maintenance costs are accounted for, renting out your investment property is a great way to earn additional income with relatively little effort. The return (income) you receive from your investment property is measured as yield. And the good news for Perth property investors is that yields are on the rise. As of August 2021, the average yield for Perth units was 5.4%, and 3.9% for houses – the highest since 2013.
- Benefit from capital growth. If you buy your investment property at a good price, and the value of the property grows, you may profit. A savvy property purchase in a developing area might be very lucrative. No form of investment can guarantee capital growth, and residential property is the same. However, in the past, the value of property in Australia has grown over the long term. Research into individual suburbs and areas can provide insight into their potential for capital growth.
- Take advantage of tax breaks. The interest payable on an investment home loan is tax-deductible, and investment strategies like negative gearing may deliver tax advantages. When the time comes to sell your property, capital gains tax discounts and exemptions apply in certain circumstances too.
- Increase the value of your investment. It’s possible to bump up the value of your investment property by renovating or improving it. It’s important to avoid over capitalising and there’s no guarantee that undertaking building work will increase your property’s value, but carefully considered renovations or cosmetic improvements may allow you to charge more rent or get a better price when it comes time to sell.
- Enjoy a relatively stable investment. The residential property market, while subject to highs and lows like any market, is typically less volatile than shares or commercial property. The share market fluctuates daily, and the commercial property market is more vulnerable to economic shocks than its residential counterpart.
The cons of investing in residential property
- Getting your capital back can take time. If you need to get your cash investment back in a hurry, selling a property can take time (more time than selling shares for example). A typical sales or auction campaign takes several weeks or more than a month.
- The possibility of vacancy. If your investment property is vacant, you won’t be earning any rent. You need to be prepared to cover all your costs if your property goes through a period without a tenant. Landlord insurance may cover loss of rent in some circumstances. Engaging a property manager can also reduce or eliminate vacant periods. Property managers, with their experience in marketing rental properties, setting appropriate rent prices and maintaining strong tenant relationships, are experts at finding, installing and keeping tenants.
- Managing property maintenance. Property maintenance and repairs are an ongoing fact of life for property investors. Drains block, hot water systems break and roofs leak – often at the most inopportune times. Apart from the occasional emergency, there’s also routine general property upkeep, like cleaning out the gutters or servicing the air conditioning, that you need to stay on top of. All repairs and maintenance – including both urgent and routine – can be handled by a property manager, saving you from emails about faulty dishwashers or Saturday night calls about blocked toilets.
- The risk of problem tenants. We’ve all heard the stories of nightmare tenants who trash rental homes, don’t pay their rent or refuse to vacate the property. While most tenants have good intentions and do the right thing, the risk of problematic tenants, albeit small, is real. Engaging a property manager to screen and vet potential tenants before they move in can greatly reduce your risk of ending up with bad tenants.
- Staying up to date with legal compliance. Every residential tenancy is subject to the relevant state property laws, and as a landlord, you are required to comply with them. The problem is, property legislation can be impenetrable to the layperson, and it’s constantly being updated. The best way to stay on top of it is to find a reputable property manager. It’s part of their job to stay up to date with ever-evolving property laws, and they can make sure that you and your property are complying with all the relevant rules.
- Maintaining the right kind of relationship with your tenants. A good relationship with your tenants is crucial to your success as a property investor but striking the right balance can be tricky. There’s a lot at stake – your biggest asset and their home – and emotion often gets in the way. If you don’t see eye-to-eye, it can be difficult to repair the relationship and it could even spell the end of the tenancy. Employing a property manager can solve the problem. They are an intermediary between you and your tenant who always acts in your best interest. They can also provide priceless professional advice if things get complicated.
Looking for expert advice about investing in Perth residential property? Our friendly and professional team can help. Contact us today.