The Risks and Rewards of Real Estate Investment

By July 28, 2023 No Comments
The Risks And Rewards Of Real Estate Investment

The Risks And Rewards Of Real Estate Investment

In a dynamic landscape of wealth-building opportunities, real estate investment has become of the most popular and proven ways to increase your wealth and build your investment portfolio.

It’s not all that hard to see why. According to the Australian Bureau of Statistics (ABS), the total value of the Australian real estate market is currently at a staggering $9.6 trillion — and steadily rising.

From those extraordinary numbers, it’s no wonder that more and more Australians are looking for ways to hop onto the property investment bandwagon. If you’re not caught up to speed on what all this means, don’t worry. As a leading buyer’s agent in the real estate industry, we’re here to unveil the risks and rewards of real estate investment.

The Rewards of House Investments

Appreciation Potential

Unlike other big purchases like cars or boats, properties have the ability to increase in value over time. This is known as ‘value appreciation’. Because of this, it is possible to earn a significant profit by selling a property that has appreciated over the years.

Paired nicely with value appreciation is the stability that properties have as an investment. While financial investments can also provide profits, real estate tends to be much less volatile than stocks and has proven to give better returns than bonds.

Rental Income

The next big reward for investing in a property is rent. Owning a property allows you to rent it out, whether wholly or partially. By renting it out, your property becomes an additional stream of income that adds to your personal finances. This amount earned from your rent is known as passive income, as you don’t need to spend time and effort (like you do at work) to get it.

As a bonus, your rent income could even cover all of your expenses, such as loan repayments or property maintenance. When this happens, the property is referred to as ‘positively geared’, meaning that it covers its own expenses and then some.

The Risks And Rewards Of Real Estate Investment Infographic 1

Tax Advantages

As long as your property is available for rent, you‘ll be able to claim some of the costs of buying it as tax deductions. Renting out a property is classified as a business, so you can claim some of its maintenance or management expenses and use that to offset your personal tax.

Apart from that, you can also get tax deductions as your property gets older. Like all physical assets, your property will experience wear and tear. This is commonly referred to as ‘depreciation’. To compensate for this, an automatic tax return is awarded to you. Claiming depreciation on your tax return can potentially net you huge savings without spending more on your property.

Diversification Benefits

As mentioned earlier, real estate is much less reactive to changes in the market than other financial investments like stocks, which makes it a defensive component of your portfolio.

Include your real estate investment in your portfolio to help diversify it. This allows your investments to suffer from less asset-specific risk, balancing out your risks across more channels as opposed to having all your eggs in one basket.

Real Estate Investment Risks

Market Fluctuations

The real estate market has been growing quite well for the past decade, but there’s no guarantee that this positive trend will continue. While property is considered to be an ‘appreciative’ asset, history has shown that this is not always true.

It is important to manage your expectations for your property’s value as the market ebbs and flows.  Remember that it is considered a commodity and, as such, is subject to the forces of supply and demand.

The Risks And Rewards Of Real Estate Investment Infographic 2

Rental Problems

Collecting a steady stream of rent each month may sound swell, but the reality is that good tenants can be hard to find. Having problematic tenants can result in delayed payments that can hurt your cash flow or, worse, property damage that costs money and time to fix.

It’s also possible that you won’t find any tenant to rent your property to, resulting in the issue of vacancy. When that happens, you’ll lose value on your investment simply because it is not providing rental returns to you. Finding good tenants can be a time-consuming process, so some owners engage a property agent to help with this.

Financing Challenges

Perhaps the biggest hurdle to getting started with property investment is money. Property is expensive; saving up enough money for a loan deposit may time you some time, and that’s not counting the fees for stamp duty, inspections, or renovations.

Unless you have a stable source of income or sufficient savings, it’s probably not a wise idea to get into real estate investment, as the significant costs involved can add up quickly and land you in a quicksand of debt.

Should You Invest in Real Estate?

Now that you’re cognisant of the risk and rewards of real estate investment, one question remains: “To invest or not to invest?”.  The answer is ultimately up to you. Remember to always do your own research, lay out the pros and cons, and seek the advice of trusted professionals before deciding.

Already thinking of getting started with property investment? At Aus Property Professionals, our team of experienced buyer’s agents are committed to helping you every step of the way. Just give us a call today to start on your path to safe and rewarding real estate investment in Australia.