Property investors are dominating the spring real estate market, accounting for almost half of today’s new mortgages. The very low interest rates we’re seeing at present are undoubtedly driving a large part of this investor interest but anyone thinking of buying a rental property needs to consider a far broader range of issues than (current)cheap financing.
According to housing finance data from the Australian Bureau of Statistics, investor finance commitments accounted for 45% of all new home loan dollars settled in July (excluding refinancers), ahead of upgraders (44%) and first home buyers (11%).
That’s a significant rush of investors, and while it may be making life difficult for first home buyers, who often compete in the same lower price brackets as investors, the key issue is that some investors may not be taking a long term outlook. And that’s critical when it comes to residential real estate.
You see, the entry and exit costs for property are high, especially compared to other asset classes like shares. Investors face expenses like stamp duty, legal fees and agent’s commission on the sale of a place, which usually all add up to many thousands.
In fact, you could be looking at buying costs totaling up to around 5% of the property’s value, with exit costs comprising a further 3% to 4% of the property’s sale price. It means a property may need to appreciate by as much as 9% before you break even – let alone make a capital gain on the place.
It can take time for property values to rise by this much. In the meantime, interest rates are likely to change from today’s levels. Sure they could fall further. But at some point they will also rise.
So while it makes sense to look for a property with tenant appeal in an a suburb with potential for capital growth, it’s also important to crunch the numbers and check that any rental property you’re considering is still a viable option if interest rates rose a few percentage points in the future. Remember, if you take out a variable rate loan, the rate you pay could vary from month to month. Yet as a landlord you may only be able to raise the rent once a lease has formally expired, and that could be every 6 or 12 months depending on the lease term.
Bear in mind too that rental properties have ongoing costs. These usually include building insurance, property management fees, council rates or strata levies, maintenance and of course unexpected repair bills can crop up.
I often hear people say “but I can claim all these expenses as a tax deduction”. That may be true however you have to pay the cost in the first place to claim the tax break.
Don’t get me wrong, a well-considered property can be an excellent investment. Just be sure to carefully do your numbers to decide if your finances can handle an investment property if interest rates were to rise. As any long term landlord knows, interest rates don’t stay low forever.