Financial planning,  Investing

Investing in property can leave you asset rich but cash poor

Investing in property has been a great way to make money in Australia for a long time, especially in the capital cities. But investors need to be careful they have sufficient cash flow outside their investment property, or things can get uncomfortably tight.

I want to say up front, this is not a discussion about the merits of investing in property, or an argument about property versus shares: it’s bleatingly obvious, property is a great asset class. It can, however, be a lot of money tied up in a single asset and if it’s not providing much net cash flow, then you need to make sure you have other cash to compensate, otherwise you can find yourself in the classic ‘asset rich, cash poor’ situation.

It’s easy to get swept up in the broad appeal of owning an investment property: the media’s full of stories about property; we often hear about people who have made fortunes from it; up until a year ago banks were happily lending to investors so funds were accessible; interest rates are still very low, and the market’s been strong.

With the tailwinds of a growing population and bank deregulation, the annual average after tax return on residential investment property in Australia over the past 20 years has been about 8%. But a lot of that has been capital gain.

At the moment the average after tax yield, that’s the cash in your hand after accounting for all the costs, on investment properties in Sydney and Melbourne is around 1% and can be less, particularly if you have a loan against the property.

If you’re considering investing in a property, or even if you already own one, you want to keep a close eye on all the outgoings involved, because they can really add up:

  • Stamp duty: unless you buy a property ‘off the plan’ your first additional cost is stamp duty. For a $400,000 property in Victoria that will cost more than $19,000.
  • Conveyancing costs: the fees you pay to settle the transaction can be around $1,000.
  • Agency fees: if you use a real estate agent to rent your property out they can charge anywhere between 5-12% of the rent. Then there’s the fees they throw on top, things like statement fees, letting fees, a margin on tradesmen’s costs, fees for new keys, and what have you.
  • Maintenance costs: there’s no end of things you might need to fix or replace, from curtains, to carpets, to electrical problems, plumbing issues, painting, you name it.
  • Rates, water, body corporate fees if you buy an apartment.
  • Land tax: if you have more than $250,000 worth of land outside your family home you’re up for land tax.

Then there’s the hassle if you’ve got a dodgy tenant who doesn’t look after the place or doesn’t pay the rent, plus the risk of not having a tenant at all for a while.

A lot of those costs are, of course, tax deductible, but that doesn’t mean they’re magically free.

Plus there’s the problem that if you need to raise some money, you can’t just hive off a portion of your property and sell it, well, not easily anyway. If you need to raise $100,000 for something critical and you own your $400,000 property outright then you can always borrow against it, but then you’re paying interest where you weren’t before.

Investing in property can be a great path to accumulating wealth; you just need to think about how you’d feel if you’re sitting on big, valuable assets, but having to count every penny in the meantime. There are smart alternatives.


This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.

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