by Jemma Pearson Investing in property is one of the best ways the average Australian grows wealth, so it pays to get educated on the basics.

WHY, OH WHY?

So, why do we invest in property? Buying your own home makes sense – we all need a place to live – but as an investment strategy or wealth creation plan, what’s this love affair Australians have with bricks and mortar?

“The two key reasons are the perception of less risk and familiarity,” says Mal Cayley, the director and head of research and acquisitions at Investor Property. “They live in property, see it every day, it’s easier to understand than other asset classes. This level of comfort provides confidence on the one hand (property) and heightens the fear of the unknown on the other (such as shares).”

But it’s not just a case of what you know. The attraction of property is that it is a tangible asset. You can add value to it through renovations and repairs and these improvements add not only to capital growth (hopefully) but also attract tenants and allow you to seek higher rent. Because rents, on the whole, continue to rise, as long as the property is tenanted it will always be returning a constant income. Income and capital growth – what more could an investor ask for?

Unfortunately when an income is involved, so is the tax man, but owning property has its tax advantages. We all know about negative gearing, where the cost of mortgage repayments exceed the income the property generates and the losses can be claimed at tax time. But many first-time investors may not know that they can also claim many costs of maintaining an investment – such as repairs, insurances, rates and management fees – as a tax deduction.

While a steady income and some tax perks are certainly attractive to investors, what many are really after is capital growth and low risk in the long term.

SAFE AS HOUSES?

“Property has proven to be a great hedge in uncertain times,” says Mal. “Throughout our country’s history there have been many ‘booms’ in various industries (think agricultural resources, manufacturing, technology, finance) and property rides these waves. However, when the ‘crashes’ come it’s always been property that has held strong and underpinned individual wealth.

One of the greatest mistakes property investors make is getting focused on the property itself. Mal Cayley

“It is the nature of the asset that helps reduce volatility too,” he adds. “With property not easily sold, it’s not subject to wild speculation on a daily basis. This smooths out some of the knee-jerk reactions to negative media and allows the market to find a true level based on supply and demand.

“So while you can create wealth through any of the asset classes, it is the lower risk and lower volatility of property that make it a more attractive investment vehicle.”

MAKE A PLAN

Sounds like you can’t go wrong, right? Unfortunately, many investors still get themselves into trouble. Mal believes this is because they don’t look at the bigger investment picture. “One of the greatest mistakes property investors make is getting focused on the property itself,” he says.

Mal says emotional justifications such as ‘I may send my child to the nearby university’ or speculative decisions such as ‘I think this area will really take off’ are exactly the wrong reasons to buy a property.

“Investing is not about an individual property,” Mal says, “It’s about the overall plan which takes into account your short- and long-term goals, based on your circumstances and the market at the time, all of which constantly change. The properties should fit the strategies within a plan.”

While you’re in the planning stages, it’s also important not to forget the small stuff – the costs of acquiring and maintaining the asset. You’ll need to pay things like stamp duty and solicitor’s fees when you purchase a property and capital gains tax when you sell it. There will be body corporate fees if you buy into a unit or townhouse complex – and watch out for any special levies that are due to be applied too. Bodies corporate can impose these levies if they, say, decide to repaint the building or replace the lifts, and this can be a sizeable chunk of cash.

You’ll also be up for ongoing maintenance and repair costs and property management fees. And while you might think you can save some cash by property managing yourself, don’t. It’s always a good idea to employ a professional property manager.

While it’s so important to get your head around the small stuff, Mal reminds his clients to keep an eye on the bigger picture.

GET EDUCATED

“[A big mistake people make] is thinking because they live in a property and they see and hear about property all the time, they understand it,” says Mal. “It is a unique asset class as it meets a basic human need. That doesn’t mean we understand it as a wealth-creation vehicle, and it’s understanding investment principles and how those principles apply to an asset class – and how that particular asset class performs – that positions someone to maximise their returns and minimise their risk. Yes you can get ‘lucky’, but I work very hard at being lucky!”

Getting ‘lucky’ also involves doing your research. Tenant vacancies mean your investment will be running at a loss, so the first thing you need to do is make sure there is rental demand for the type of property you’re looking to buy. Check into things like council and development plans for the area you are buying into – these can impact on the value of your asset positively or adversely. If your property has a view, are you likely to lose it to future developments? Are there any plans to build a highway behind the back fence? What about future infrastructure such as hospitals and schools that may improve values?

Mal’s final word of advice? “We are constantly asked to ‘rescue’ people who thought that just buying a property was going to set them on their path to freedom, and find themselves stuck,” he says. “No one sets out to fail, the problem is that people just don’t know what they don’t know. Property investing is no different to investing in anything else. Unless you have the expertise to maximise your returns, you are putting yourself at risk. The way to maximise returns while minimising risk is to seek professional assistance.”

NEED MORE HELP?

The Real Estate Institute of Queensland is the peak body for the property industry, representing agents, auctioneers, business brokers, property managers and many other industry professionals. But the REIQ also offers advice to buyers, sellers, landlords and tenants. Head to www.reiq.com.au and click on ‘buying & selling tips’ to find out more.

INVESTOR EXTRAS

Get insured
Real Estate Institute of Queensland managing director Dan Molloy advises buyers to insure their new properties in the lead-up to settlement. “The property is legally the buyer’s responsibility from 5pm on the first business day after the contract date, so it is vitally important that appropriate insurance is organised prior to this time,” he says. A quick phone call to your insurer is usually all it takes to guarantee you are covered right from the start.

Change your will
If you die without a will the laws on intestacy will dictate the way your estate is distributed once you are gone, so it’s a good idea to make a will and update it every time you buy or sell property. Remember, if you gift a property to a loved one he or she inherits the mortgage on it as well. Speak to your solicitor about any concerns.

What to do before you buy
• Get your finances up to date and talk to your accountant about your financial position and the tax implications of buying property.
• Talk to your bank manager or mortgage broker to get an idea of how much you can borrow, but also do your own budget – you need to be comfortable about the repayments you’ll be committing to.
• Speak to a financial adviser or property investment expert such as Mal Cayley from Investor Property about your goals, and develop a long-term investment strategy.
• Research the market – attend open homes and auctions, talk to agents, find out what renters are after. Look into future development in the area where you’re looking to buy.
• Talk to property managers about what they do and how much they charge for their services.