Many people still dream of investment property. You are probably here because you are thinking of owning property as well.
Before you take the plunge, though, it’s best to acquaint yourself with the world of real estate. Here are four facts no potential home buyer should miss:
Land Value Does Not Depreciate—House Value Does
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One of the common reasons people think of property investment is because they believe it doesn’t depreciate. Instead, it appreciates—its value grows over time.
In reality, it’s only half-true. The value of land sure goes up since it’s a finite resource. As the population in Australia increases, it becomes essential and in demand.
In the law of supply and demand, if the need arises, the supply doesn’t, the price increases.
A home, meanwhile, is a different story. It undergoes depreciation for many reasons from the materials used to the environment it’s in. It’s also the reason why you have to spend money on maintenance and home improvement.
The good news is Australia allows you to deduct depreciation expenses to your taxes if it’s a rental home or an investment property.
Real Estate Is The Least Liquid Asset
Experts suggest venturing into investment property only when you already have enough savings and manageable debt.
Real estate, after all, is the least-liquid asset. It can take you weeks or months before you can convert it into cash.
Compare that to a savings account or even stocks. You can withdraw money in the bank anytime (as long as it’s not under time deposit). It may also take two to three days to change your shares into money.
If You Cannot Afford A Home, Try “Rent Vesting”
Australia has one of the priciest homes in the world. According to the World Economic Forum, it could take about a decade for a regular worker to purchase a 650-square-feet house in Sydney. It’s even more expensive to buy a home here than in San Francisco or Los Angeles.
For this reason, more millennials consider rent vesting. It works this way:
- You rent a home in your preferred location.
- You then purchase an affordable property in a growing area and then rent it out.
- You use your rental income to pay off some or all of your lease costs.
Many Lenders Have Mortgage Insurance
Since Australia’s home prices are high, many would-be buyers struggle with the deposit or down payment. To resolve this, many lenders now allow you to get as much as 95% of the home price as a loan. It means you pay only 5% outright.
It may sound good, but here’s a caveat: it will have mortgage insurance. This policy covers the lender, not you. It guarantees them that in case you default, the bank (or any lender) doesn’t suffer any loss.
It also means you pay for it as a premium or a one-time payment, depending on the rules of the lender.
You may avoid it usually through a higher loan-to-value ratio (LTV). Often, it’s at least 80% or a fifth of the price of your home.
Some lenders, though, will still charge you with mortgage insurance regardless of your LTV ratio.
Real estate remains a lucrative type of investment property. The value of land will only increase over time. As more people migrate to Australia, you can anticipate future tenants or property buyers.