Of course, there are a number of issues to weigh before deciding to invest in real estate. Some of them are positive factors for investors, such as:
Low barrier to entry
Real estate is often seen as less risky than other investments, often because it doesn’t require any special specialist knowledge, such as is required in a niche market, such as NFT trading or buying and selling cryptocurrencies. It also comes with many benefits such as capital gains, rental yield and tax deductions, which we will explore below.
Real estate capital growth
Capital growth refers to the increase in value of your property over time, which is calculated by comparing the current market value with your original purchase price. For example, if you bought a property for $500,000 ten years ago and it is now worth $900,000, you have earned $400,000 in capital.
Australian property investors have traditionally enjoyed high returns on capital gains. According to the last CoreLogic Pain and Gain Reportwhich consolidates data of approximately 102,000 resales during the quarter, 93.8% of those sales made a profit.
“This was flat in the March quarter, but declined from a recent high of 94.1% in the three months to April 2022,” the report said.
Overall, the median gain for sellers during the quarter was $270,000, while the median loss was $33,500.
While capital growth will take years or even decades to reach your bank account, rental yield offers more immediate rewards.
Ultimately, the rental yield is the difference between the income you receive from tenants minus the overall costs of your investment.
If you intend to let your property to tenants, it is essential that you consider the potential rental yield of the investment property.
As Lilly Schneider, real estate investment advisor at Abercromby’s explains, a rental yield between 6 and 11% would be considered a good return on investment.
However, the rental yield differs from state to state.
“Generally, rental yields are higher in capital cities than in regional or metropolitan areas, although a significant change in lifestyle as a result of the pandemic has resulted in a noticeable change over the past 24 months for some regions. of the country,” Schnieder said.
Additionally, investors may find that properties with good rental yields tend to be cheaper to purchase than those located in areas promising good long-term capital gains. This means that the costs associated with a purchase, such as tax and mortgage refunds, will also be lower overall.
Investment in a physical asset
For some, one of the main determining factors for investing in real estate is that it is a tangible, physical asset. Unlike stocks, individuals can see their investment in its physicality. They can walk past the property whenever they want; they can fix anything that’s broken.
This tangibility “gives confidence and total control to investors, which is not guaranteed when investing in the stock market,” explains Schnieder.
If you rent out your property, you can claim deductions for most expenses you incur during these periods.
Enter the negative gear tax relief. As the ATO explains, your rental property is “positively matched” if your deductible expenses are less than the income you earn from the property. If your deductible expenses are higher and therefore you are not making any profit from renting out your property, then it is said to be “negatively reduced”.
Speaking to Forbes Advisor, Pina Brandi, director of PB Property, explains that the negative gear tax relief was made available in the 1980s to stimulate construction and help the government adapt to the population growing in Australia.
“Australians benefit from a negative gear because the government does not have the resources to provide an adequate volume of housing for the burgeoning population, let alone affordability programs and incentives,” says Brandi.
“By adding tax incentives for investors, [the government has created] an incentive for investors to buy and support the construction of more housing. This translates into more jobs, more service providers, more opportunities and allows the country to develop.
The capital gains tax reduction is another tax incentive enjoyed by investors. The CGT rebate was introduced by the Howard government in 1999 and allows individual taxpayers to reduce their CGT by 50% if the asset, including the property, has been held for at least 12 months.
However, it is important to note that if the property is your home and you started using it for rental or commercial purposes less than 12 months before disposing of it, you cannot claim the CGT reduction.