But plenty of economists are still warning that Australians are paying the highest ever house prices relative to income.
Even finance gurus like “Rich Dad, Poor Dad” author, Robert Kiyosaki, are saying the biggest-ever real estate bubble is about to burst. So how do people know if it’s the right time to dip their toe in and buy an investment property?
Investor Tip One: You have spare cash to invest in your future
No-one really knows the future performance of the property market. In Australia, population growth is strong and supply is limited, which suggests further growth in property prices.
However, unemployment has not peaked, the Reserve Bank is threatening interest rate rises and property prices are already high.
Investing in property is always a long-term proposition, with time in the market more important than trying to time the market. That means you have to be prepared to hold a property investment for longer than investors during previous cycles.
If you have the cash flow to pay the extra mortgage on an investment property or the time to source a positive cashflow property (see tip three), then there is really no reason not to invest. Most financial advisers will tell you that property and shares are the two asset classes that tend to outperform bank savings – so it’s up to you to decide whether bricks and mortar or the risks of the share market are for you.
You don’t need to be debt-free to invest in property but you do need to understand that taking on more debt to secure an income-producing growth asset can get you ahead of the game in the long term. As the property asset grows in value, you only even need to repay what you borrowed, and you can keep the rest to fund your own retirement.
Investor Tip Two: You know the risks
Property has proven to be a long-term financial asset that grows in capital value faster than inflation. But just because it has done this in the past is no guarantee of its future performance.
Any investor faces the chance of losing their money. That’s the biggest risk of all. The other risks include the rental income or capital growth not meeting your expectations. Or personal risks such as job loss, illness or marriage breakdown which can throw your spare cashflow into disarray.
The beauty of property as an investment today is its acceptability by banks as a security for borrowing.
Capital growth is important over time. But most investors know the real trick is to hold the property for as long as you can to gain the maximum capital growth while earning rental income.
Investor Tip Three: Cashflow positive properties are better than negative gearing
Negative gearing has lured plenty of mums and dads into the property market as they chase tax breaks and the chance to own a property that grows in value over time.
But cashflow positive properties – those where the rental income pays more than the mortgage and maintenance costs – are actually the best properties to invest in.
Cashflow aspects of an investment property should be more important to you than potential growth rates, since the ability of a property to support its own costs can allow you to hold the property for longer and lower any risks.
Not all properties will be able to earn a rent that exceeds the borrowing and holding costs.
However, negative gearing in the first two or three years of a property investment, and then upgrading with clever renovations to earn better rent returns, can create a cashflow positive property within a short timeframe.
Investor Tip Four: Stay informed and do your research
Following the property market can make investors nervous, especially when they see price falls – which do happen!
Australian house prices fell by 4.2 per cent this year, but all properties in various locations will perform differently. Some properties will grow in price, even during market downturns.
Good investors research their market well to consider all risks. They stay informed, ask questions and keep abreast of recent sales results, through www.onthehouse.com.au.
Property investment doesn’t always run smoothly and at times it will seem the risks are too great to overcome, but slowly and surely a property portfolio will grow and prosper.
Investor Tip Five: To lower risks, watch your ratios
You might have heard of LVR, or loan value ratio, which is a percentage banks and lenders use to assess risk on different types of property.
An 80% LVR means there is a 20% deposit (or capital) from the property purchaser and the bank finances the rest of the purchase price.
As banks toughen lending criteria and mortgage insurers charge higher premiums, it makes sense to aim for at least a 20% deposit on a residential investment property investments.
Previously, it had been easy to borrow against the equity in your home and raise a 100% LVR property investment loan. But times have changed. Investors lower their risks by having large deposits, which act as a buffer against a falling market or forced selling.
The bonus of paying a full 20% deposit for an investment property is that lenders cannot slug you with Lenders Mortgage Insurance, which typically costs thousands of dollars but only protects the banks, not you.
The best property investments grow in capital value and return an income (through rent) that will eventually exceed the mortgage costs and any spending on maintenance and repairs.