Typically over a period of time the value of property increases: this is referred to as ‘capital gain’. By selecting an area that meets core criteria the potential and percentage increase of this capital gain is higher.
If you can service the debt (make the repayments and pay the costs) then this is like a forced savings plan.
Most people who own their own home for a number of years have been able to pay the loan repayments and the value of their home has increased. By doing this over a period of time they develop ‘wealth’ which can be referred to as ‘equity in their home’. The median house price in Sydney has grown from $505,000 in 2008 to $980,000 in 2018, which means after 10 years Sydney homeowners may have generated half a million dollars in equity. Most of these people would immediately tell you that they would not have been able to save half a million dollars any other way over that same time period!
The reason to buy an investment property include:
When the value of the investment property rises
Typically over a 10 year period in Australia most properties double in value: you can look at every suburb and you can get capital yield figures over the last 50 or more years. Naturally the rate of growth varies and you can research and pick areas which are statistically likely to increase more than other areas. If the property value increases and you have serviced the debt over that time, then you have generated wealth.
Investment properties provide tax advantages
- Costs of having an investment property can be offset against the income from rent and from your personal income. A tax agent should forecast the possible benefits for you. But they will exist;
- You are allowed to apply the relevant tax depreciation schedule to both the property (house) and the inclusions in the house (installed appliances) which can provide you an improved tax position;
- The level of gearing will effect both serviceability and tax positions.
Rent is income
The rental is income, just like an employer paying you. Having a portfolio of properties creates a passive income stream.
A ‘Plan B’ for paying off your residential mortgage
When you do your math and work out how long it will take you to pay off your mortgage, then you may be looking at a non-favourable mathematical equation; you may need to work longer than you had planned initially! An Investment property could provide a way of selling that Ip in the future and using the funds to pay out your residential mortgage.
A ‘Plan C’ for having a retirement income or nest egg
By applying the same reasons, an additional IP can be retained by you through retirement years, allowing you to retire earlier, because you can use the IP as an income stream. If you were clever enough to develop a portfolio of IPs then you can live off the income stream, or sell them as you see fit to achieve financial objectives in later years.
Help your family by creating financial options for them or guaranteeing
You may be able to establish a personal financial position where you can later use equity in IPs to be able to assist family members like your children when they what to buy their first homes.