3 reasons to buy a rental property

3 reasons to buy a rental property

Rental properties are a popular investment for many people. Below are 3 main reasons why owning property is a major investment choice.

Tax Incentives

Rental properties are a common investment for Australian Taxpayers, one of the main reasons why they are so popular is the tax deduction received for the net losses from the property against other income, resulting in a larger tax refund.

The losses are the result of the running costs of the property exceeding the income received through the rent charged, this set of circumstances is also known as negative gearing.

As the outgoing expenses of the property exceed the incoming rent from the property, over a period of time- it is hoped that the increase in market value exceeds the cost of running the property over that same time frame, resulting in a net profit from the property. As a rule of thumb the longer the property is owned the higher the likelihood of making a profit from the property.

Making a profit

Excluding any tax consequences, the expectation is that the property’s sale price will exceed the total purchase costs of the property, plus the annual costs of maintaining and running the property over the years owned, and the final sale costs.

Say you have purchased a property and the total cost of the property is $500,000, and every year your out of pocket expenses, to cover any loans and running costs, come to $10,000, then, when the property is sold, the real estate agent fees add another $10,000 to the expenses.

If the property is owned for 10 years, the total costs of owning the property are $610,000, ($500,000 + (10 x $10,000) + $10,000).  If the sale price of the property is then greater than the entirety of these expenses, a profit has been made. If it is less, then a loss has been incurred.

 

Adding Mix to investment Portfolio

Spreading your savings portfolio over several asset types is a good way to diversify the earning potential of your savings. You may already have savings in term deposits or shares, by adding a property investment your dollars become more widely spread over several investment groups. Why might this be benificial?

Depending on the time frame, one group of investments may outperform another as shown by the graph below.

Investment performance of shares and property

Graph courtesy of the Sydney Morning Herald

As you can see, over 10 years, (orange), shares outperformed property and over 20 years property outperformed shares. Without the use of a crystal ball, knowing what will happen in the future is unpredictable, so holding a balanced portfolio is a good option.

Did one or several of the above reasons influence why you bought, or intend to buy, a rental property? Or do you have another reason? Please feel free to share your own experiences and leave your feedback in the comments below. Subscribe to my newsletter to receive more rental property updates.