Obstacles to Investing in Property

It’s an interesting time in the investment property market. Rental properties in many areas are enjoying strong demand with record lows in vacancies.

So what’s stopping you from investing?

According to the Real Estate Institute of Australia, the peak body represent real estate agents, vacancy rates in rental properties remain at historically low rates. Interestingly, of all the capital cities it is Darwin that has the tightest rental market with a vacancy rate of only 0.5%.

Because demand is exceeding supply, it is no surprise that rents are increasing across all capital cities, in particular for three bedroom houses and two bedroom units. Rents have increased by between 5% and 8% in the last three months alone.

In this climate many people are thinking about property investment. Rising rents and high occupancy rates make the investment look more attractive, particularly when compared to the somewhat volatile share market.

But despite the attractions, many people will not follow through and become an investor. So what are the typical obstacles, and how can they be overcome?

1. I can’t afford to invest

Many people are unaware of the amount of equity in their own home. This equity can be used to secure finance for an investment property.

The loan repayments themselves can be offset by the rental payments and tax offsets for such items as building depreciation. This can mean that your net payment for holding an investment property is minimal.

Indeed, some financial advisers advocate only purchasing properties with a positive cash flow. Whilst hard to find, these properties will pay you money from day one.

To help overcome this obstacle you should ask these questions. If I don’t invest in quality assets such as property and hold them for the medium to long term, then how will I fund a comfortable lifestyle in retirement? Will super and/or the old age pension be sufficient?

2. Property is so unaffordable these days

You don’t need to get a cheap property in order for it to be an affordable investment. If the return on the investment is strong enough, and you have access to the funds for that property, then it’s affordable for you.

In other words it’s about the net costs to you, not simply the gross costs of the home loan repayments.

3. Property can’t go up anymore

Looking back over the past 40 to 50 years can reveal that property, like shares, consistently increases in price. In Australia we know that we have a long term policy of increasing our population through immigration, and everyone needs somewhere to live.

The key to overcoming this obstacle is to look for well-located property as this will always be in demand. Asking questions such as these will help. Is the property close to good transport? Are there good schools nearby? Is the area up and coming, or is it in decline?

4. Property is too difficult to sell quickly

This obstacle is often borne of the fear that if “things go wrong” it’s difficult to sell up quickly and get your money back plus pay back the home loan.

It is true that property takes longer to sell than shares, which can be readily sold within a day. But with this flexibility comes a greater tendency for price fluctuations in the short term, as we have witnessed recently.

The key to overcoming this obstacle is to be prepared. Do you have an emergency fund that you can call up on if, for example, the property retains untenanted for a period? If you don't, what alternative arrangements can you put in place?

For example, you can have a line of credit or redraw facility on standby. Also, there are landlord insurance policies that can cover some risks (eg if a tenant leaves without paying the outstanding rent).

5. I don’t know how to pick properties

This obstacle can be overcome through research. Reading property magazines and independent reports is a start point, as well as property investment books. Attending seminars by professional experts (not property spruikers!) is another good source of information, as is looking through property listings papers and supplements of local papers, and using specialist property data websites.

Once you’ve narrowed down a few likely areas, then you should talk to the local real estate agents, and then actually go and inspect some properties.

There really is no better way than doing the groundwork yourself. No-one will care as much about your investment as you do, so it is important to put in the time to become more confident in your ability.

Next Steps

The key thing is take the first step, however small, towards your goal. Then, once you’ve made a start, you can face each of the obstacles and work out a strategy to overcome them.