What to consider before investing in property Published 25 Oct 2021 | Updated September 26th, 2023
If you’re thinking about buying your first investment property, congratulations! Property investment continues to be one of the most popular ways to create wealth. A successful property investment, however, is not guaranteed, and it can turn into a financial headache if things go wrong.
As with many big decisions in life, it’s important to first think about what your goals are, and if property is indeed the right investment strategy for you.
Having a clear idea of what you want to achieve will help you determine this, and define the type of property and location that is best suited to meet your financial (How much do I need to buy an investment property in Australia?
) and lifestyle needs. Unlike buying a home to live in, the goal of property investment is to make money, but the approach to this will vary for each investor.
Some properties may be better suited to generating positive income straight away, while other properties may be more expensive upfront, but experience a greater increase in value over a number of years, which could suit investors who plan on holding on to the property and then selling for a profit later on.
The increase in the value of the property over time is known as capital growth
, and is an important factor in determining the success of your investment. In Australia, the average capital growth for residential properties is 6% per annum, so historically, most residential real estate experiences steady growth over the long term.
As with all types of investments, there are potential risks to be aware of. For property investing, these include:
- Market risks: The risk of financial loss due to market movements. This risk is not easily mitigated and can affect all asset classes. The best way to protect yourself from market risks is to hold onto the investment property over the long term.
- Liquidity risks: Liquidity refers to how easily a property can be sold if the owner needs access to funds to meet his or her financial obligations. In real estate, it can sometimes be difficult to sell a property quickly, which is why it’s best to invest in areas with strong demand and limited supply.
- Interest rate risks: Rising interest rates for variable rate mortgages can significantly impact a property owner’s ability to service a loan. Interest rates are controlled by the Reserve Bank and are influenced by a number of economic factors such as household spending, employment and inflation. This risk can be offset through a fixed-rate mortgage and appropriate cash flow management.