Property Investing: Plenty To Think About

It is not breaking any news to say that many Australians are enthusiastic investors in direct property.

Indeed, the recently-released tax statistics 2012-13 shows that about 1.6 million individuals claimed $22.5 billion in interest rate deductions for their rental properties for that financial year.

The vast majority of these property investors are either negatively-geared (their deductions exceed their rental income with the short-fall being deductible against their other income) or positively-geared (their rental income exceeds their deductions).

In 2012-13, individuals claimed negative-gearing losses of $5.4 billion – down from $7.8 billion in the previous year. This reduction was apparently largely due to the successive interest rate cuts.

The lowest interest rates on record along with headlines of rising house prices in such capitals as Sydney and Melbourne will undoubtedly encourage more investors to think about a direct property investment for the first time.

A temptation to try to make the most of a prevailing low interest rate can overshadow some of the key considerations that would-be property investors should take into account before putting down their deposits.

Factors to consider include:

A property’s potential for capital growth – particularly given the strength of the residential market to date in some capitals.
The ability for an investor to cope with future interest rate rises.
Whether the rental yield is satisfactory for an investor’s circumstances.
The effect that a direct property may have on the diversification of an investor’s overall portfolio. Obviously, a high-cost property can easily dominate an investment portfolio that may otherwise be carefully diversified for risk and return between at least the main asset classes of shares, property, fixed interest and cash.

Further, it should be emphasised that while gearing magnifies any capital gains, it also magnifies any capital losses.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.

As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

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