Capital growth or rental income, why do you want to invest in property?
In addition to the price you pay for an investment property, you’ll also have to pay stamp duty, settlement fees and maybe even building and pest inspection fees.
Stamp duty is a state-based tax and the amount you’ll have to pay will depend on each state or territory’s individual model, but typically the higher the cost of the property, the higher the stamp duty will be. For example, in New South Wales, the stamp duty payable on a $600,000 property will be about $22,000, but in the same state the stamp duty on an $800,000 property will be about $31,000.
Subsequently, when buying an investment property, you’ll have to wait for it to rise in value equivalent to the costs of buying it before you can break even. When determining your final profit margin, you’ll also have to take into account the costs of selling.
If you want to sell your investment property, and you engage a real estate agent to oversee the process, you’ll have to pay them a fee. Selling agents’ fees will vary from company to company but it can usually be about 2% of the selling price, and in some instances higher.
Therefore, at a 2% charge, if you sell your property for $600,000, you’ll have to pay $12,000 to the selling agent. Any profits you make on the buying and selling of residential property may also be taxed, which will need to be factored into your profit margin.
If you’re investing in property for capital growth, then you’ll benefit more the longer you hold the property, provided it increases in value over time. This is because the gains will be compounded, meaning you’ll earn interest on interest.
For example, a $400,000 property with a 6% annual compounded growth rate will be worth $716,339 after 10 years. But after 20 years the property will be worth $1,282,854. Therefore in the first decade the property increased in value by $316,339, but in the second decade it increased by $566,515 because interest was being earned on the gains made from the first decade.
Property markets typically run in cycles, as demand and supply rises and falls. Therefore, property prices won’t increase in a linear fashion but will typically experience ebbs and flows through multiple property cycles over time.
Some people may try to time the market by buying an investment property at the bottom of a cycle and selling it at the top of a cycle. However, it’s extremely difficult to accurately predict peaks and troughs in the market. The buying and selling costs also mean that the property has to rise very significantly in value in that time.
Instead of trying to time the market, it can be better to take a long-term view and focus on properties that are best placed to grow in value over a longer period of time, while keeping in mind that there can be peaks and troughs along the way. It’s important to also note that some people can buy an investment property on emotion, rather than using an objective view of the market.
This particularly happens when property values are rising and investors buy property for fear of missing out on the price growth. This can be problematic when buying at the peak of an up-cycle and then the market starts to cool as the investor may have to wait several years for the next upswing in prices, and could even experience negative equity (when the value of the property falls below the size of the loan).
While buying an investment property can deliver financial benefits through capital growth and rental income, it can be best to invest with a long-term outlook.
The high cost of buying and selling property, as well as the difficulty to pick market peaks and troughs, can make it tricky to turn a profit from property in a short time period. Also, the advantages of compound growth also show that you’ll benefit more the longer you hold a property, provided it continues to increase over time.
Therefore, property investors need to consider how buying an investment property fits into their immediate financial and life goals as well as those into the future, and look for properties that will perform over the long term. See more about finding an investment property to suit your goals.
Some more insights into property investment