Property Investing Essentials For Dummies: Australian Edition

By Nicola McDougall and Bruce Brammall

A quick-start guide to investing in Australia’s property market

Are you looking for the best information on when, where, and how to choose an investment property? Do you want savvy, sensible, easy-to-follow investing strategies that will help you build long-term wealth? Property Investing Essentials For Dummies is your go-to guide for finding an investment property that delivers maximum returns, with minimum risk. With this book, you'll get practical advice and smart tips to help you navigate today’s property market.

Whether you're new to investing or you’re looking to expand your portfolio, Property Investing Essentials For Dummies walks you through everything you need — from financing options to evaluating specific investment opportunities.

• Understand how to borrow against equity as well as more advanced strategies for mortgages and financing
• Compare different investment strategies: urban vs. rural, established vs. new build, residential vs. commercial, property development, flipping a property, and more
• Learn how to assess different areas and properties to find the best location and value for your next investment
• Find tenants, uphold your responsibilities as a landlord or landlady, and work with a property manager
• Grow your investment property into an income-generating investment portfolio

With Property Investing Essentials For Dummies, you'll be empowered to make informed decisions and achieve your financial goals. So why wait? Learn how you can take the next step in your investing journey today!

• Language: English
• Publisher: Wiley
• Release date: Aug 22, 2023
• ISBN: 9781394170463

Book preview

Introduction

Welcome to Property Investing Essentials For Dummies — your essential guide to growing and sustaining a property investment portfolio.

Over the past two or three decades, the number of property investors has continued to increase, as more and more of us have decided to take charge of our financial futures by purchasing a strategically selected real estate investment asset — or perhaps two, three or even more.

Most of us dream of improving our financial situations throughout our working lives as well as in retirement, and property investment can be a relatively simple and low-risk way to make this happen.

However, the most educated investors are usually the ones who achieve the best financial outcomes, because they have taken the time to learn the ins and outs of real estate investment and leaned on expert assistance from time to time as well.

They recognise that buying an investment property is very different to buying a home to live in, so they are prepared to educate themselves on what may be the ideal property investment strategy for them personally.

That’s because no one-size-fits-all approach is possible in strategic property investment — contrary to what spruikers might try to convince you. Rather, you need to understand the pros and cons of the myriad property investment options, so you can make informed decisions on which option is right for you and your unique financial hopes and dreams.

Regardless of whether property prices are rising or falling, a plethora of investment opportunities remain for anyone who is prepared to put in the time and effort to learn as much as they can about real estate as an investment asset class — and is prepared to keep their eyes firmly fixed on the financial prize that comes with time in the market.

How This Book Is Different

If you expect us (in property spruiker fashion) to tell you how to become an overnight multi-millionaire, this is definitely not the book for you. And please allow us to save you money, disappointment and heartache by telling you that such shysters are only enriching themselves through their grossly overpriced seminars or online courses, or through urging you into their property developments with funding from their related-party loans.

Property Investing Essentials For Dummies covers tried and proven real estate investing strategies that real people, just like you, use to build wealth and achieve their dreams of home ownership.

Unlike so many property book authors, though, we don’t have an alternative agenda in writing this book. Some real estate investing books are little more than promotional materials for high-priced seminars or developments the author is selling. The objective of our book is to give you the best information for property investors, so that, when you buy a property asset or two, you can do so wisely and confidently.

Foolish Assumptions

Whenever authors sit down to write books, they have particular audiences in mind. Because of this, they must make some assumptions about who the reader is and what that reader is looking for. Here are a few assumptions we’ve made about you:

You’re looking for a way to invest in real estate but don’t know what types of properties and strategies are best. (We’ll show you.)

You’re considering buying an investment property, be it a house, a unit, an apartment or flat, a small apartment or unit complex or an office building, but your real estate experience is largely limited to renting an apartment or owning your own home.

You may have a small amount of money already invested in real estate, but you’re ready to go after more or bigger properties.

You’re looking for a way to diversify your investment portfolio.

If any of these descriptions hits home for you, you’ve come to the right place

Icons Used in This Book

Throughout this book, you can find friendly and useful icons to enhance your reading pleasure and to note specific types of information. Here’s what each icon means:

Remember This icon flags concepts and facts that we want to ensure you remember as you make your real estate investments.

Technical Stuff Included with this icon are more complex examples and interesting technical stuff that you may want to read to become even more familiar with the topic.

Tip This icon points out something that can save you time, headaches, money or all of the above!

Warning Here we’re trying to direct you away from blunders and errors that others have made when investing in property, as well as other concerns that could really cost you big bucks.

Where to Go from Here

If you have the time and desire, we encourage you to read this book in its entirety. It provides you with a detailed picture of how to maximise your returns while minimising your risks as a property investor. But you may also choose to read selected portions. That’s one of the great things (among many) about For Dummies books. You can readily pick and choose the information you read based on your individual needs.

Part 1

Understanding Property as an Investment Vehicle

IN THIS PART …

Compare real estate investing with alternatives and understand how to fit property into your overall wealth creation plans.

Uncover the different types of properties you can purchase, and consider other property strategies — such as buying and flipping, and property development.

Find out how to assemble a team of competent and experienced property investment professionals to help ensure your long-term property investment dreams can be realised.

Chapter 1

Understanding Real Estate as an Investment

IN THIS CHAPTER

Bullet Getting motivated for property investment

Bullet Contrasting real estate with other investment options

Bullet Deciding whether real estate works for you

Bullet Arranging your overall financial plans to include real estate

Bullet Watching out for performance statistics

Property investment has evolved since the start of the 21st century with about 20 per cent of households now owning real estate investments outside of their own homes. From that entrepreneurial percentage the majority — or about 70 per cent — will only ever own one investment property and another 19 per cent will buy two.

So, contrary to some scare-mongering media headlines, about 90 per cent of property investors own just one or two properties. Often, the reasons so few people own portfolios with multiple properties are less than ideal, including a lack of property investment education and understanding, as well as choosing the wrong property and location to start off with.

This book will help you put the work in and avoid the same mistakes. Whatever your long-term property dreams — whether you have a desire to own multiple investment properties, or even just one or two — you will have the knowledge and strategies to do so.

In this chapter, we share our experiences, insights and thoughts on the long-term strategy for building wealth through real estate that, at its core, is a fundamentally simple and low-risk investment plan that virtually everyone with a long-term time frame and determination can understand and achieve.

Finding Your Motivation

It’s never too early or too late to formulate your own plan and create a comprehensive wealth-building strategy. Such a strategy can help with improving your financial future and ensuring a comfortable retirement.

One of the challenges involved with real estate investment is that it takes some real planning to get started. Without doubt, calling a stockbroker and purchasing a few shares in your favourite company is a lot easier than purchasing your first rental property. But buying good property can be more time-consuming than difficult. You just need a financial and real estate investment plan, a lot of patience, and the willingness to do some research and legwork, and you’re on your way to building your own real estate portfolio — and you can even engage an expert team to do some of the heavy lifting for you.

Remember The vast majority of people who don’t make money in real estate made easily avoidable mistakes, which we help you steer clear of.

In this chapter, we give you some information that can help you decide whether you have what it takes to make money and be comfortable with investing in real estate. Unlike almost any other type of investment, real estate is hands-on. When you own shares in a company, you can’t personally dictate how that company operates, or influence how profitable it is. Direct investment in property is the opposite. You’re in control. Major decisions are in your hands. You can determine how to lift your income and how to raise your profits (or capital gains or equity). In this chapter, we compare real estate investments with other investments you may be considering. We provide some questions you need to ask yourself before making decisions. And, finally, we offer guidance on how real estate investments can fit into your overall personal financial plans.

Throughout history, some of the wealthiest people — regardless of their industry — have also increased their net worth via property investment in both residential and commercial assets. They have done so because they understand the profit potential of strategic real estate holdings. They invest in property not only for diversification and capital growth reasons, but also to supercharge their income streams.

Stacking Up Real Estate Against Other Investments

You’ve surely heard about or even considered many different investments over the years. To help you appreciate and understand the unique attributes of real estate, in the following sections we compare it with other wealth-building investments such as shares and running your own business, using key economic attributes.

Returns

Clearly, a major reason many people invest in real estate is for the healthy total returns (which can include both ongoing income and the capital appreciation of the property). Real estate can generate robust long-term returns because, like shares and small business, it’s an ownership investment. By that, we mean that real estate is an asset that has the ability to produce income and capital growth.

Our research and experience suggest that total real estate investment returns are comparable to those from shares (about 7 to 10 per cent annually, measured over decades). And you can earn returns better than 10 per cent per year if you select excellent properties in the best areas and manage them well. That said, investing in real estate is accompanied by the following:

Few knockout wins: Your returns from real estate probably won’t approach the knockout wins that can be achieved by the most accomplished entrepreneurs in the business world or by picking penny-dreadful shares on the stock market and doubling your return in a month — but that is speculation rather than investment strategy. Real estate profits take time — profits are gained through hard work, good judgement, plenty of research, and tapping into expert advice and guidance when needed.

Ups and downs: You’re not going to earn a 7 to 10 per cent return every year. Although you have the potential for significant capital growth, owning real estate isn’t like owning a licence to print money. Like stocks and other types of ownership investments, real estate goes through down as well as up periods. Most people who make money investing in real estate do so because they buy and hold property over a number of market cycles.

High transaction costs: If you buy a property and then want out a year or two later, you may find that, even though the property has appreciated in value, much of your profit has been wiped away by the high transaction costs. Typically, the costs of buying and selling — which include stamp duty, real estate agent commissions, loan fees, property taxes and other settlement costs — can amount to up to 10 per cent of the purchase (or selling) price of a property. So, although you may be elated if your property appreciates 10 per cent in value in a short time, you may not be so thrilled to realise that most of the capital growth disappears in buying and selling costs.

Tax implications: Last, but not least, when you make a profit on your real estate investment, the Australian Taxation Office (ATO) is waiting with open hands for their share. So, throughout this book, we highlight ways to improve your after-tax returns. As we stress more than once, the profit you have left after the ATO takes its bite is all that really matters.

Risk

Real estate doesn’t always rise in value. That said, market values for real estate don’t usually suffer from as much volatility as share prices do. You’re far less likely to experience roller-coaster ups and downs with real estate market values. The reason is land — even if the building is removed from a piece of land, the land itself generally retains its value. With an apartment block, the value of the land might be as little as 10 per cent of the full purchase price, which is far from ideal for investors. For some houses, the value of the land could be as much as 70 per cent.

HOW LEVERAGE AFFECTS YOUR REAL ESTATE RETURNS

Real estate is different from most other investments in that you can borrow (finance) a large percentage of the cost of the asset. The loan can often amount to as much as 80 or 90 per cent of the actual purchase cost of the property, depending on your other assets and what your bank will agree to. Thus, you can use a relatively small deposit to buy, own and control a much larger investment. You can borrow money to invest in shares — although we don’t recommend it. And if you do borrow to invest in shares, you’re unlikely to be able to borrow as high a percentage of the purchase cost and your mortgage rate is likely to be higher. (You’re also likely to be subject to margin calls if the value of your security drops in relation to the loan amount, meaning you need to reduce your loan amount, contribute additional security or sell part of your investment.)

So, when your real estate increases in value (which is your aim), your returns are leveraged to take into account your total investment (your own deposit, plus the borrowed amount).

Take a look at this simple example. Suppose that you purchase a property for $600,000 and pay a $60,000 deposit. Over the next three years, imagine that the property appreciates 20 per cent to $720,000. Thus, you have a potential profit (on paper) of $120,000 ($720,000 minus $600,000) on an investment of just $60,000. In other words, you’ve made a 200 per cent return on your investment. (Note: This example ignores cash flow — whether your expenses from the property exceed the rental income that you collect or vice versa and any potential lenders mortgage insurance — and the tax benefits