Property investing has become a popular Australian pastime with one in ten taxpayers owning a negatively geared property. But just what makes a good bricks-and-mortar investment – known as investment property? It’s not about buying any old house or unit, that’s for sure, and it’s most certainly not about buying something you’d want to live in or even in an area that you necessarily find desirable. Over the next few weeks I will investigate what factors to consider in an investment purchase.
The first biggie is what is better – good price growth, or a high rental return?
There’s two ways to measure your return on your investment property australia. Capital growth – the change in price over time – and rental yield – how much rent you’re getting as a proportion of what you paid for the place. Gross rental yield is your annual rent divided by the purchase price, or value, of the property.
People often talk about buying investment properties with high rental returns. However, most of the professionals who buy property on behalf of investors would advise going for capital growth primarily, and then aiming for a decent yield. Their argument is that just like interest payments left untouched in a bank account, house price rises have a compounding effect when the market is going up. Rent payments on the other hand are generally used to service the costs of owning a property – that is they help to pay interest payments, rates and so forth, and they don’t compound. A bit like if you had a bank account and kept withdrawing the interest payments, it might provide an income stream but you wouldn’t get the benefits of growth on growth.