Returns from property
Property has two types of potential returns. One is from rent paid by tenants and the other is from the property potentially increasing in value – (called capital gain).
Property investments are not considered to be ‘liquid’ because you can’t withdraw your investment quickly. To get money out you need to sell the property or increase the mortgage. This may not be easy – and there can be extra costs such as a Registered Valuation and Real-Estate Agent fees.
People generally buy investment properties to make a long-term profit as property prices rise. In the short term there may be little or no profit from rent after expenses like mortgage, insurance, rates and maintenance are taken into account.
Borrowing for Investment Property
It is usually harder to borrow money for a rental property than for your own home. Some lenders may have lower lending limits for investment properties. As with ordinary home loans, lenders will first look at what you can afford to repay.
Some lenders and mortgage brokers have particular expertise in lending for investment.
Risk of Investing in Investment Property
Tip: Property requires much more work than other investments; for example bank deposits, shares and bonds.
Property investment is often described as ‘safe as houses’. Yet there can be risks, for example:
- Your lender could ask you to repay the mortgage unexpectedly and you may not be able to sell, or sell for enough to cover the mortgage.
- If the investment property is mortgaged with the same bank as your own home, there is the risk that the bank could sell both properties if you run into difficulty with paying either mortgage.
- You might need, for some reason, to sell the property at a time when it has dropped in value, and be left still owing the lender money after the sale.
- Interest rates may increase, so the money you make from the property is reduced.
- You need to manage your properties or get a rental manager to do so
Paying off the mortgage as quickly as you can, reduces these risks.
