In this article, we explore the land-dwelling dynamic and offer a unique perspective for investors to consider, before buying an investment property.
Is property a good investment? (An appreciating asset VS a depreciating asset)
When you’re looking to buy an investment property, it’s crucial to understand that you’re not just buying a house; you’re investing in two distinct components – the land and the dwelling. Smart property investments consider the ratio of each element within a transaction. The land element of an investment historically has a growth rate of 7% to 10% per year in Australia and this is the appreciating asset component of your property investment. Conversely the dwelling, including the house or unit that sits upon the land, steadily depreciates over time.
The ATO suggests that depreciation on an investment property sits between 2.5% and 4% per year, with a property fully depreciated in 25 – 40 years. Considering the two elements in isolation demonstrates how the land appreciation must work to outweigh the investment property depreciation, to make for a smart property investment.
In addition to capital growth it’s also important to compare the income you’d earn from renting the property to the interest you would pay on the loan. Ideally you would want the rent to cover the interest although many Australians own investment properties where this isn’t the case and instead take advantage of negative gearing. Negative gearing enables investment property owners to offset the difference between rent and interest against your personal income.
Which location is best for property investment?
In the world of investment property, there’s a saying that holds true: “buy the worst house on the best street.” The reason behind this mantra is simple yet profound. It advises investors to focus on acquiring assets with a high land value component and a lower dwelling value. By following this guidance, you position yourself with a greater weighting in an appreciating asset, setting the trajectory for future growth and paving the way to make money buying property.
If you’re planning to rent the property you also need to factor in the maintenance and upkeep costs. You want to avoid a need to invest too much into fixing issues, otherwise this will negatively impact your rental return.
Is it better to invest in property or shares in Australia?
Investing doesn’t have to be property OR shares, they each offer unique benefits and risks within an investment portfolio. If however you’re deciding between investing in property vs investing in shares, there are some distinct differences.
Investing in a diversified share market portfolio, like those we offer at Stockspot, provides an approach to investing based on Nobel Prize winning research. Aligning your investment with your risk appetite and time horizons, allows you to personalise an investment to meet your unique needs and challenges.
Unlike property, where you’re dealing with both appreciating and depreciating assets simultaneously, a share market portfolio comprises of assets that appreciate in their entirety, removing the conflicting element from your growth journey. Essentially, when you’re benefiting from growth in your shares, you benefit from the whole growth (rather than just a proportion as in property). Historically Stockspot’s high growth portfolio ‘Topaz’ has achieved growth of 8.5% over the past 5 years to January 2024, whereas data published by Australian Bureau of Statistics suggests total value of dwelling stock has increased by 8% over the past 5 years (from June 2018 – June 2023). Note that housing stock includes the value of improvements (renovations) as we describe in Investing in property: are the returns worth it and therefore the actual increase, excluding the value of improvements, is likely to be lower.
You can also gain exposure to the property market, without investing in a physical property, by investing in ETFs that hold real estate, I have previously compared the best ASX property and real estate ETFs.
Is property a good long term investment?
When buying an investment property, it is important to consider the weighting of your investment within each element of the asset. Shifting your focus to the land value, even if the dwelling may not be as aesthetically pleasing, is likely to set you in a better position to achieve success in property investing. Remember that buying the best property on the worst street, offers you a larger weighting in an appreciating asset and a lower exposure to a depreciating asset. Your ego might need to take a back seat, but your long-term financial growth will undoubtedly thank you for it.
If you’d like to hear more about how stock market investing can support your investment strategy, speak to one of our investment advisers today.
