When news outlets are reporting that house prices rose by a record 20 percent in the year to the end of March 2010, first home owners cry into their beer while investors are on the sidelines cheering it on. In fact, according to the Australian Taxation Office one in seven taxpayers now owns at least one investment property.
Yes, there are more interest-rate hikes mooted, but surely the tax benefits of negative gearing help to neutralise those? Particularly now the federal government has confirmed it has shelved or rejected the Henry Tax Review's recommendations to reduce negative gearing tax rates.
All of which may have you asking, why haven't I sunk my money into bricks and mortar? Of course, it's not that simple. Deciding whether property investment is worth the "baked beans on toast" approach you may have to take needs some thought. We asked two experts for some tips on how to decide whether you're landlord material.
Why do you think people choose property investment over other types?
Susan Jackson, financial services professional with the Women's Financial Network, Melbourne: They've often been through the process before — buying their own home — and it's a tangible asset. They can drive past it, other people they know do it and it's seen as a smart thing to do, and it's an emotional decision.
I could point out to people 20 reasons why they might be better off investing in shares, but if their emotional thinking is telling them otherwise, it overrides any logic I can put forward.
Stuart Wemyss, financial advisor and author of The Property Puzzle: How to develop a plan to achieve financial freedom through property investment ($29.95): I think it's easier for people to understand than the stock market, it's less volatile than the stock market because you're forced to make long-term decisions, and it's physical. You can walk through your investment.
What are the most common misconceptions about property investment?
Wemyss: That it's as "safe as houses". Particularly at the moment, I think one of the biggest risks is that feeling that property is invincible. Housing is like any other growth asset: it moves in cycles and that can include a potential decline in value.
Jackson: That any property will do well. You have to buy the best property you can afford. A crap property may command a decent price in a strong market, but if the market turns, you're left with a real dog.
Wemyss: The notion that all properties are equal is a problem. It couldn't be further from the truth. There are good, bad and average properties, and the bad and average make up 85 to 90 percent of the market. When you're talking about a good property for investment purposes, it must be above average. The property, street and suburb can make or break the strategy.
What makes a good investment property?
Wemyss: Investing is all about risk and managing risk. We can't influence return — the market will do what it does — but we can manage the risk. You must look at past performance: how have properties in that area performed over the long term?
Get to know suburbs and pinpoint the streets that are regarded as "good streets". Look at past sales — up to 20 years — and look at the growth. That's the most compelling evidence that will help demonstrate future growth rate.
Jackson: You need to look at a property and decide if it will stand up as an investment in any market. Think about the amenities you would want in that area and see if it ticks the boxes. Car park? Transport? Well-maintained? Always buy with future resale in mind — don't rely on the market to create the return. And look to see if you can add some value.
Wemyss: The key fundamental drivers of growth are: water, schools, entertainment, health, shopping and transport. If a property has shown little growth over recent times, think about why you think it will change. Try not to be speculative (trying to pick the next growth suburb), it's about investment.
What about negative gearing? Is it all it's cracked up to be?
Jackson: I don't think people really understand negative gearing. I think they like the idea of getting some tax back, but I also think they sometimes overlook the cashflow costs of the property. Gearing helps to defray costs, but you will still be out of pocket.
Wemyss: According to the Australian Tax Office, the aggregate gearing benefits claimed in 2008 was $8.6 billion. Which means that property investors lost $8.6 billion in that year. There's a lot of talk about investors getting into it because they're paying too much tax, but that's starting from the negative.
Saving tax will never make anyone independently wealthy. Tax should be number four, five or six on the list of benefits when it comes to investing. It should never be the main driver in any kind of investment. Start like that and you'll be worse off.
What are your top three things to consider when investing?
Wemyss: Past performance; affordability — stay close to the median value of the area you're considering to attract more renters in the short term and more buyers in the long term; and the fundamental factors that drive growth to ensure you're buying a "good" property.
Jackson: Cashflow costs — make sure you can manage the costs for the next five to seven years, minimum, as it takes at least four years to start to make a net profit; research your investment and then your managing agent and/or tenants; remember, it's essential to maintain your asset.
Where's the best place to go for advice?
Wemyss: Look for a "fee for service", independent financial advisor. You want someone with equal knowledge of shares and property. If you can't find one of those, talk to your accountant, but be aware that there are limitations to what they can tell you.
By Allison Tait, ninemsn Finance
Read More: http://finance.ninemsn.com.au
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