Australians have always had a love affair with investing in ‘bricks and mortar’ housing because you can touch and feel their investment, says Damian Roylance managing Director of Entourage Finance in Byron Bay.
Damien has been in the mortgage broking industry since 2006 and says that while buying investment properties can work well for many investors it is something everyone needs to enter with their eyes open.
‘Not many people get past owning two properties. The latest date from the Australian Taxation Office (ATO) revels that 2,245,539 Australians or around 20 per cent of Australia’s 11.4 million taxpayers owned an investment property in 2020-2021. This is the latest data from June 2023 that shows 71.5 per cent of these investors hold one investment property, 18 per cent hold two investment properties, and 9.7 per cent hold three, four or five investment properties,’ he told Echo Property.
Once people have got onto the property ladder with their own home and gain some equity in their property, there is the potential to look at utilising that equity to purchase an investment property. While many see this as a way forward potential investors need to also be aware of the risks.
‘Any bank or lender will look at a borrower’s household expenditure measure (HEM), their average basic living expenses, which goes up automatically with changes in the economy and the expenses increase with the more you earn,’ explains Damien.
‘This will impact people’s borrowing capacity, how much money people can borrow. In the last 12 months, due to interest rates and the increase in costs of living, people’s borrowing capacity has dropped by 30–40 per cent compared to during Covid when interest sat at an average of two per cent.
‘Australian’s see investment properties as a way of building wealth and an avenue to financial freedom. For example, the value of property in Byron Bay has increased 360 per cent over the last ten years (as of April 2023). On average property values across the Northern Rivers have doubled over the past five years while Kingscliff has seen a 237 per cent increase and Suffolk Park 256 per cent increase according to The Property Tribune.’
Once people are in the property market, it can become effective to leverage off one property or properties value and equity to facilitate the purchase of future investment properties. This can have the benefits of providing a passive rental income, capital growth (increasing value of the property), tax benefits, and the use of negative gearing where owners can claim interest rates, water rates, and property management fees as a cost. For some people, the value is also in being able to take loans out against properties to facilitate their lifestyle, travel, holidays, paying school fees, cars or other investments.
Understand the risks
However, Damien says it is important to do your research and understand the risks associated with the property investment market and your own financial situation.
‘For example, you need to look at the market and buy at the right time. For many people who bought in the Northern Rivers during Covid they may have lost about 20 per cent or more of the property’s’ value in the past year or two.
‘The increase in interest rates is also impacting peoples’ holding costs. If an investor had borrowed $1 million to buy a property at two per cent interest, they would have been paying back $20,000 per year of interest. At 6.5 per cent interest that becomes $65,000 per year they are paying back, and that is just the interest on the loan.
‘For many people who have bought land to construct their homes on, the increase in building costs are also having a significant impact,’ says Damien. ‘A lot of people buy property to add value to the land with renovating or constructing a brand new build.
‘Building costs have gone through the roof and once people have engaged architects, and gone through council, with a 30 per cent increase in the cost of building materials since Covid, this is making some of the buy-to-build projects people had started no longer viable.
‘I’m finding a lot of clients are going through the process to design and get ready to build, then when they receive the building quotes, they pull the pin on the project.’
Other risks are around the cost of repairs to investment properties, bad tenants who damage the property or don’t pay their rent, and investors must always be prepared for when a property may end up vacant for a period.
‘Investors must be able to cover the period where they are not receiving rent. People need a buffer, and it is always good to have liquid cash available for these times,’ said Damien.
Be unattached
When you are looking at a potential investment property it is important to remain unattached. Many people look to where they live, a beach house or where they might like to holiday to buy investment properties but that is not always the best place to invest, says Damien.
‘Sometimes it is better to look at another state where there is a better opportunity for the investment. For example, in Victoria there is a land tax on any investment property valued at or over $50,000. In NSW you pay zero land tax on in investment property up to $969,000. So, you will pay $4,350 a year land tax on an $950,000 investment property in Victoria but nothing on an investment property of that value in NSW.
‘I recommend that if you are looking to invest in a property then get professional advice, the selection of the asset is crucial. Look at what might drive up or lower the value of the property in the future. Make sure you look at and understand the numbers and keep in mind the risk of interest rate rises.
‘Be clear about what your reasons are for buying an investment property and make sure that it is not an emotional decision,’ said Damien.
For four decades The Echo has printed the stories some people loved, some people hated, and some pretended not to read. If you want us to keep telling the truth, the real truth, not the sugar-coated version. We’ll need your support to keep the presses rolling. 
