Investing in property can be a good way to build wealth – but there are several factors you need to consider. The potential tax benefits and wealth generation make real estate an attractive investment option for many Australians, but it is not without any drawbacks.
Average real estate return on investment
The average rental yield in Australia is around 8%, with 1% accounting for ongoing costs like dues, strata and insurance fees.
However, in the short term, a significant surge in house prices is unlikely. As interest rates remain restrictive and unemployment rates might increase in 2023, the positive impact of demand and supply issues will be limited. Nationwide prices are expected to rise by approximately 2 per cent by the end of 2023.
Tasmania as a whole has risen to the top of many property investors lists, mainly because it is affordable compared to Australia's other state capitals, but also due to lifestyle factors which continue to draw people to the Apple Isle.
Take the time to factor in your everyday living expenses, existing debts, financial commitments, and realistic rental income and expenses. Generally, you'll need 20% of the property's value (which is determined by the bank's valuation of the property) as your deposit, to avoid paying Lenders Mortgage Insurance (LMI).
The concept is to buy properties that produce a monthly rental income of at least 1% of the purchase price. While this is great in theory, market conditions don't always support the rule. If a property is for sale at $500,000, the 1% rule means that the monthly gross rental income should be $5,000.
You need at least $25,038 in deposit for a $300,000 house as a first home buyer or if you aren't a first home buyer you'd need to pay $3,000 extra in stamp duty, meaning you'd need at least $28,432 in deposit on a $300,000 home in Queensland.
Property investment requires a larger amount of capital and can take a long time to provide returns. It's often considered to be a safer investment than shares though and you can use equity to build your portfolio without additional capital.
The best commercial properties to invest in include industrial, office, retail, hospitality, and multifamily projects. For investors with a strong focus on improving their local communities, commercial real estate investing can support that focus.
The average annual growth rate for well-located capital city properties is about 7%, which means that Australia's median dwelling price should be around $1.1 million in 2030. But some properties will outperform others by 50-100% in terms of capital growth, so take these house price predictions with a big pinch of salt.
Melbourne and Hobart are braced for falls of 10 per cent, while Adelaide, Darwin and Perth will see a marginally softer single-digit drop, the report said. The flipside is, even with potential falls of up to 10 per cent, national property prices will still be more than 18 per cent above pre-pandemic levels.
What is a good rental yield in Australia? What is a good rental yield? A good rental yield in Australia falls anywhere between 7% and 8% for capital city suburbs. In the regional areas, houses bring rental yields of 12% to 13%, while you can expect rental yields of 8.5% to 11% for units.
Just more than 30% of the country's roughly 11m private residential dwellings are considered property investments.
An investment property which has a high rental yield (generally between 8-10%) may mean that it's undervalued. However, a property that returns a low rental yield (between 2-4%) could suggest that it's overvalued.
High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces.
Fixed interest and cash investments will generally be low risk (defensive assets) and assets such as property and shares are generally considered to be high risk (growth assets).
If you're looking for a long-term investment that will provide you with a steady income in retirement, then superannuation is a good option. But if you're looking for an investment that you can enjoy prior to retirement while also potentially earning a good return, then property may be the way to go.
Is real estate less volatile than the stock market? Generally, yes. It depends on the particular stock and real estate investment (there are numerous ways to invest in real estate and they're not all equally risky), but real estate is typically less volatile than the stock market.
Although shares are generally considered higher risk, that doesn't mean all sharemarket investments are always riskier than all property investments.
This means if you're looking to buy a house with a value of $800,000, you'll need a deposit somewhere between $40,000 and $80,000. Read: The key to home ownership: know your borrowing power.
In most cases, home loan lenders will lend up to 80% of the property value, meaning you'll need to come up with the other 20% (your deposit). For a property of $400,000, for example, you'll need a cash deposit of $80,000.