Property investment: what it is and how it works

I

What property investment involves

AMP's guide describes property investment as investing in residential property in Australia, with options for building a portfolio using property. A CommBank guide frames it as buying an investment property, with a strategy that may aim for capital growth or rental yield. Capital growth refers to how much a property's value rises over time; yield is the return from the investment, most often rent.

The AMP guide lists potential benefits: property is tangible and can be less volatile than other investments, and it offers potential long-term returns if its value increases, plus potential rental income before a sale. It also lists considerations. Buying and selling carry costs beyond the cost of the property itself, including stamp duty, legal fees, inspections for building and pests, loan set-up costs and capital gains tax, and fees for a real estate agent.

On ongoing costs, the AMP guide lists rates from council and water, strata fees, repairs, maintenance, property management fees, vacancy costs, insurance and land tax. It discusses negative gearing, where an investment's income is below its expenses, and positive gearing, where income is greater than expenses. The guide notes there are no guarantees and that equity, the market value of a property minus what is owed, can rise or fall.

II

How a bank guide says buying works

A CommBank guide sets out five steps for buying an investment property. It begins with a deposit and working out borrowing power. The next step is deciding an investment strategy, such as whether the aim is income now or a longer-term hold while debt is paid down and the property increases in value. The guide then suggests researching property and location.

In its research step, the guide says properties close to transport, health services, shops, childcare and other amenities are typically more in demand. They may cost more at first, but generally attract higher rents. The guide says a buyer can compare what similar properties sell for and rent for to estimate likely rental yield. It then covers choosing a loan with features such as fixed or variable interest rates, offset accounts, redraw and interest-only periods.

The final step is settlement and management. The guide says settlement proceeds as it would when buying a home, except the buyer does not collect the keys and move in. Instead, a property manager is engaged and a new tenant found, or an existing lease taken over. The guide notes that with a property manager and relevant insurance in place, the process continues.

III

What investors weigh

The AMP guide sets out potential benefits and considerations side by side. It says property is tangible and that lenders often have a standard process for property loans. It also points to costs of buying and selling, tax implications, and the fact that returns are not guaranteed.

The guide mentions access to equity: an investor could use equity to secure a loan for another investment, but equity is not a guarantee and can rise or fall. It also notes that borrowing against equity increases debt levels and uses the property as security. The guide says the market value of a property can go up or down, so equity can also rise and fall.

The CommBank guide describes capital growth and yield as common aims. It says properties bought for high growth are often more expensive and negatively geared, while high-yield properties are generally more affordable and positively geared. It also says different loan types can help achieve different results, with features such as fixed and variable rates, offset accounts, redraw and interest-only periods.

IV

Words people meet

A few terms recur. Capital growth refers to how much a property's value rises over time. Yield is the return from the investment, most often rent. Equity is the current market value of a property minus the amount owed. Negative gearing is a situation where an investment's income is below its expenses; positive gearing is the reverse.

The AMP guide treats tax as one consideration and says the tax treatment of an investment property differs from that of a home the owner lives in. It lists tax benefits among potential advantages and notes that where a negatively geared property runs at an income loss, the investor depends entirely on capital growth for any return. It also says there are no guarantees.