Australians have long been in love with the idea of owning residential property. Traditionally regarded as simply providing a secure home, two further views have gained ground in recent years: property as a long-term investment in passive income, and property flipping as a short-term path to rapid capital gains. Both approaches have merit as well as drawbacks.
Long-term property investment: slow and sure, with a bit of help from the tax man . . .
Australian house price data shows that the national average price has steadily risen by more than 400% in real terms (CPI adjusted) since 1975, although peaks and troughs have been more evident since 2004. This has made housing an attractive long-term investment for both owner-occupiers and landlords, with the latter gaining the added advantages of rental income, and the potential for negative gearing and application of the 6-year rule for CGT exemption.
. . . but not without its challenges
While the news is all good for owner-occupiers prepared to stay in place for a number of years to avoid short-term dips in house prices and enjoy the benefit of their CGT-free main residence, investors intending to rent out their property need to consider the following possible problems:
• Tenant issues. Screening, late rent, damage, disputes.
• Vacancy risk. Loss of rent.
• Maintenance and repair costs.
• Market risk. Fluctuating property values and rental demand.
• Property management costs, or the stress of managing oneself.
• Interest rate volatility if mortgaged.
• Legal and tax compliance. Ever-changing landlord laws and tax rules, recent political focus on negative gearing.
Bearing this in mind, property flipping may appear more attractive.
Property flipping: potential for quick rewards . . .
Turn a tired and rundown house into a desirable and more expensive property with judicious renovations and improvements while living in it, and you may qualify for a CGT exemption even if you sell it after a relatively short period. Rinse and repeat, to reinvest your profit in another candidate for upgrading and continually build up your equity. When market conditions are favourable, property flipping can be a profitable option for anyone with a talent for spotting a house ripe for enhancement and a flair for home improvement projects.
. . . if you’re prepared for the risks
However, once again it’s question of balancing the risks against the rewards. A quick look at house price graphs reveals that it’s not always a smooth upward progression. Get your timing wrong and you could hit one of the troughs, resulting in a significant financial loss after you factor in your cost of renovations, stamp duty and any mortgage interest. It may also be harder to qualify for a mortgage on a short-term property holding.
And, while you may qualify for CGT exemptions if you live in each property for at least 12 months before selling, there is no guarantee that you will. The ATO is increasing its scrutiny of homeowners who repeatedly buy, renovate and sell properties, and may deem your activities to be a business venture. This means you could have to pay CGT, as well as income tax on your profits, and in some cases be obliged to add GST to the property’s selling price.
Summary risk and return comparison
Property flipping offers high short-term return potential but comes with significant risks, including market volatility, tax complications, and stricter mortgage requirements. It is best suited to experienced investors and renovators who have a high risk appetite, available capital, and the time to manage renovation projects effectively.
In contrast, rental property investment provides moderate, long-term returns with a medium to low risk profile. Risks include tenant and vacancy issues, ongoing maintenance costs, and compliance with regulations. This strategy is ideal for investors seeking steady, long-term growth, passive income, and tax advantages with relatively lower exposure to market fluctuations.
Which property investment strategy will work best for you?
Before embarking on property investment, a consultation with a financial adviser will help you to determine your appetite for risk and assess your capital and practical capabilities, to find an investment strategy that aligns with your financial goals. Your financial adviser has the knowledge and experience to guide you through the detailed benefits and pitfalls, so that you can make an informed decision to secure your financial future.
In Australia, qualified and licensed financial advisers have a legal obligation to act in the best interests of their clients and avoid conflicts of interest. So, rather than listening to the persuasion of property spruikers – who may out of self-interest advocate using a self-managed super fund to access funds for property investment – rely instead on your financial adviser to give you unbiased guidance.
