Many Australian investors like to invest in residential property, and there are good reasons for that. Residential property has been a strong long-term performer, comparable with the sharemarket, although the dividends from shares return more than net rents, and are more tax-effective. But if you borrow to buy an investment property, interest on the loan and most property expenses can be offset against rental income, for tax purposes.
Property can appear to be less volatile than shares or other investments, and you can expect to earn rental income and benefit from capital growth. You're also investing in something you can see and touch, and improve the value of through your own efforts.
There are potential pitfalls. Property has very high entry and exit costs such as stamp duty, legal fees and real estate agent's fees, and you may not be able to sell the property easily. Property ties up a lot of money in one large asset, which can work against investment diversification.
On the other hand, residential property can bear a lot more leverage than shares. If you’ve borrowed, your rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs. An increase in interest rates will increase your repayments and may decrease your disposable income. There could also be periods of time where you don't have a tenant – meaning you’ve got no rent coming in – you’ll have to cover all costs yourself. In the extreme worst-case, if the value of your property were to fall, you could end up owing more than the property is worth, which is known as negative equity.
But if you’ve done your research and are buying in areas that you know, for the long term, property investment can be a profitable investment.