Investing in property can be a great way to secure your financial future and grow your wealth. However, with interest rates and the cost of living rising, understanding the potential risks of investing in property can help you make an informed decision.
Residential or Commercial Property
There are two main types of properties to invest in, residential and commercial. Residential property investment is the most common type and includes family homes, apartments, and townhouses. Commercial property investment refers to the purchase of a property for business purposes, such as an office building, warehouse, or a retail space.
Rental Yield Potential
One important consideration when investing in property is the potential rental yield. This is the amount of money you earn from renting out your property in comparison to the purchase price.
In Australia, the average residential rental yield is around 2% to 6%, while the average commercial rental yield is 5% to 10%.
It is important to make sure the rental yield aligns with the market average, otherwise, you may be at risk of not covering your expenses or even losing money.
One thing to keep in mind is the potential yield is generally negatively correlated with the level of risk associated with the investment type. The higher the potential or perceived risk of the investment, the higher the yield tends to be, to compensate investors for the larger risk being taken.
Structure of Your Property Portfolio and the Investment
The structure of your investment is important to consider. For example, are you investing in an individual property, a portfolio of properties, or a property fund?
Each investment structure has its own advantages and disadvantages, and it is important to understand the risks associated with each option.
The structure you choose to buy your investment through may be the biggest consideration outside the investment itself to consider. Are you planning on investing directly by yourself? Perhaps with another person, such as your spouse? Or using a structure such as a unit trust, or perhaps require something more sophisticated, such as a partnership of trusts?
Each has its own taxation consequences that differ for different types of investors. Getting this right from the start is paramount, as not only can getting it wrong result in unnecessary tax leakage, but the costs of unwinding or altering the structure at a later point could make the exercise unfeasible and the overall investment unprofitable.
Consider your Investment Time Horizon and the Potential for an Increase in Value
Capital growth is the increase in value of your property over time. When evaluating a property investment, it is important to consider the potential for capital growth, alongside your investment time horizon (ITH).
Your ITH is the time period you expect to hold the property as an investment. This is useful for investment goals, strategies, and expectations and can help to determine if your investment will increase in value over time. While capital growth can be difficult to predict, it is important to research the market and consider factors such as location, demand, and supply.
This should be considered not only when purchasing, but whether these factors will change when you eventually sell the property in the future. This may help you guide your research and whether the capital growth over time should arise.
Purchasing a Residential Property Through Your Self-Managed Super Fund
Bonus tip – buying a residential property through your self-managed super fund (SMSF) is a great way to diversify your portfolio. However, there a several rules that your fund must comply with including:
- The property must meet the ‘sole purpose test’
- The property can’t be purchased from a related party of a member of the fund
- The property can’t be lived in or rented by any member of the fund or related parties
Purchasing a property through your SMSF can also come with additional fees and charges.
Before commencing any purchase, it’s best to discuss the additional implications for your super, compliance issues and requirements with your accountant.
For assistance around understanding the tax implications when purchasing investment properties, contact us today.
