Editied By Michael Severino & Peter Koulizos

The great Australian dream is to own your own home.
It is built into our psyche that owning property is something to strive for and be proud of. And today, three out of four properties are bought by owner-occupiers.
Before you start investing in property, however, you need to ask yourself: what is my goal?

Do you want to:
• retire richer?
• retire earlier?
• supplement your income?
• give up your day job?

Buying the right type of property in the right location will help you to achieve your goal. It is important to establish what your goal(s) is at the outset because it will determine which strategy - renovate, develop or buy and hold - you apply.
But why choose to invest in property rather than the other growth asset - shares? There are many good reasons, including:

• capital growth
• rental income
• hedge against inflation
• tax benefits
• greater degree of control
• lower volatility
• high demand.

Let’s take a look at each of these in detail.

Capital growth
Putting your money in the bank or investing in fixed interest does not give you any capital growth. If you purchase property, however, you do so expecting that the underlying value of the asset will grow. While this is generally the case, you need to ensure that you buy property in the right location to maximise your capital growth. For example, a new house on the outskirts of Melbourne’s metropolitan area bought for $400 000 may grow at 5 per cent per annum, whereas a well-located property in an up-and-coming suburb, bought at the same price, could grow at 10 per cent per annum. In 10 years’ time, the new property on the outskirts will not have even doubled in value, while the well-located property will be worth more than $1 million. If you had bought the property in the prime location, you could possibly retire in 12 years’ time, based on your increased net wealth; you could not retire on the funds from the poorer performing outer suburban property. Even though properties increase in value over time, it is crucial that you buy in the right location to maximise your returns.

Rental income
One of the benefits of owning investment property is that you start receiving an income almost straightaway. In the current market, you could settle on a property during the week and by the weekend you could have a tenant who will have paid you some rent in advance. With the other asset classes, you often have to wait until the end of your term (in the case of a term deposit) or until your dividends are due, which is usually two to four times per year.

Hedge against inflation
An inevitable part of life is inflation, and the rate of inflation varies according to the strength of the economy. One of the benefits of holding property is that property values increase at a greater rate than inflation. This is great news if you already own property, but not such great news if you are looking to buy property. The important thing to keep in mind is to buy the right property in the right location.

Tax benefits
There are several tax benefits available to property investors, including claiming interest and expenses, and depreciation (both on the building and the fixtures and fittings).
Using property as security to borrow money to purchase other property allows you to leverage (borrow against the security) to a greater extent than if you were using a share portfolio as security. Most lenders generally lend up to 95 per cent of the value of the property being purchased, whereas they generally lend up to 70 per cent if you were purchasing shares. For example, if you wanted to purchase a property worth $400 000, a lender may be willing to lend you $380 000. This means you need to fund only $20 000, plus fees (assuming that you have no other security). If you wanted to purchase $400 000 worth of shares, however, the same lender may only advance $280 000. This means you have to fund the shortfall of $120 000, plus fees. Another advantage is that you can claim a greater tax deduction on the interest charged on the loan.
Any legitimate expense incurred in running your investment property should also be tax deductible. For example, if you travel to the property to collect the rent, you can claim a deduction. Alternatively, money paid to a property manager to manage your property is tax deductible. Even money spent purchasing this book may be tax deductible!
Depreciation of the building may also be claimed as a tax deduction. The age of the building will determine if you can claim any depreciation and at what rate you can depreciate it. Buying a new or relatively new property (built after 17 July 1985) allows for the greatest amount of depreciation. Claiming building depreciation is a smart way to increase your cash flow.
Bear in mind, though, you should never buy property just for tax purposes. Getting a tax benefit should simply be a bonus of investing in property, not the sole reason for purchasing.
Greater degree of control
Owning property allows a greater degree of control than owning shares. For example, as a share owner you cannot improve the value of your shares. However, as a property owner you can add value to your investment by painting, landscaping or renovating. For a few thousand dollars, you can get much more than that back in added value.

Lower volatility
Although it does have downturns, the property market is not as volatile as the sharemarket. You can sleep well knowing that the price of your property will not plummet overnight, which can happen to shares. Keep in mind also that the security is in the land, not necessarily the building, which makes getting the location right particularly important. As mentioned in chapter 1, land appreciates, whereas buildings depreciate as they get older. The exceptions to this rule are period-style houses, which increase in value over time due to their rarity.

High demand
Everyone needs a place to live. For this reason, property, especially well-located property, will always be in demand. At the time of writing, our capital cities are recording high rates of immigration and a rise in international student numbers. But while demand for property is steadily increasing, supply is unable to keep up with it. If this situation continues, prices are likely to increase sharply in the near future.

This is an extract from The Property Professor's Top Australian Suburbs - A Guide for Investors & Homebuyers published by Wrightbooks.

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