Is property a good investment for doctors?
Investing in real estate has many benefits:
- For doctors, obtaining finance for property investment can be much easier than it is for other borrowers.
- It has the potential to produce capital growth and rental yield. The power of compounding returns means property investment can be a good investment.
- It typically generates robust long term returns.
- It helps to build equity as the property value appreciates. You can use the equity to invest in other properties.
- You can often borrow the entire costs associated with investing in property.
- Negative gearing benefits.
- It is an excellent retirement nest egg.
- You can manage your cash flow through rental income.
- It’s easier to understand than other investment opportunities.
However, investing in property is not without risks:
- The property market will go through cycles, and it may not always generate the return you expect. However, it is not as volatile as the share market.
- Property investment requires many thousands of dollars.
Why are doctors interested in building a property portfolio?
- Tax savings is just the icing on the cake.
- Since you’re considered a low-risk borrower, lenders waive lenders mortgage insurance, even when you’re borrowing more than 80% of the property value.
- You don’t have to save a large deposit, since most lenders offer between 90% to 100% investment loans for most doctors.
- Due to the nature of your profession, you’re likely to be more financially secure than other borrowers.
So, what is a property portfolio?
It is a collection of investment properties, that is either owned by an individual, a trust or a company.
Many doctors limit their property purchases to a family home and a holiday home and fail to explore property portfolio opportunities.
How do I build a property portfolio?
- Choosing the right location is important when building a property portfolio. Don’t put all your eggs in one basket. Spread your investments across different areas to increase your chances of capital growth or rental yield each year.
- If you own a home, use the equity to invest in a second property. It’s good practice to know the ballpark value to ensure the assessor is not undervaluing your home.
- Define your investment strategy, whether you want to focus on rental yield or capital growth. As a doctor, you can prioritise a capital growth strategy since you can cover the investment loan cost.
- Consider the structure. Do you want to go at it alone, or with a trust or company?
- If you’re aiming for a positively geared property, go for rental yield. A positively geared property is one where the rental income is higher than the costs of owning the property.
- You can also choose to negatively gear your property as the loss from renting the investment property can be offset against your salary and reduce your total taxable income.
- Do not cut corners and settle just because you’re time-poor. Take advice from professionals who can help you choose investment-grade properties that can provide rental yield and capital growth.
- Be aware that when it comes to off-the-plan investments lenders are more conservative.
- Consider putting money in your offset account, so you pay less in interest. Access the money in the offset as a deposit for another property.
- Consider a split mortgage – where a certain portion of your investment loan is fixed, and the other is on a variable rate home loan.
How to choose the right location to build a property portfolio?
- Look for areas with steady population growthThere should be employment diversification
- Research building permit approvals and the vacancy rates to avoid areas with an oversupply of housing.
- The rental level trend will indicate how much tenants are willing to pay and can pay.
- Investigate areas were major infrastructure projects are underway.
What are the common mistakes when building a property portfolio?
As first-time property investors, doctors can make the following mistakes:
- You do not claim for full tax entitlements related to tax depreciation and negative gearing.
- You buy an investment property close to your home, instead of venturing into other areas.
- You were swayed by the opinions of your friends and family instead of seeking independent advice.
- You overestimated the rental returns.
- You chose the wrong loan, i.e. instead of interest only, you decided to pay both the principal and interest. The interest paid on the investment loan is tax-deductible during the interest-only period.
- You bought in an area that doesn’t appeal to tenants.
- There is an oversupply of property, which leads to low rental income and limited growth rates.
- You are selecting your tenant instead of using the help of a qualified property manager.
- You bought the property to suit your lifestyle instead of your tenants’ lifestyle.
A cornerstone of a strong property portfolio is making a good start.
If you did invest in an underperforming property, sell it fast and learn from the mistakes you made.
How many properties should I have in my portfolio?
There is no magic number as to how many properties you must have in your portfolio.
Try to aim for high-quality properties that will deliver strong growth in the long run and properties that provide passive income.
Capital growth or rental yield – which one is better?
There’s no right answer, it’s entirely dependent on your investment goals.
That said, investors who already receive a high income tend to focus on capital growth.
Should I buy a property with my spouse/partner?
This is a great question to ask your accountant, but if you’re in a relationship, it’s possible for the title of the property to be in both names.
A joint tenant, where both your names will appear on the property title, is a good option if you are in a similar tax bracket. The income and expenses will be recorded individually on each of your tax returns in equal parts.
If your spouse/partner is on a lower tax bracket, then it’s a good option to place a positively geared property in his/her name.
A negatively geared property should be placed in the name of the partner with the higher income as it creates a larger return that aids cashflow.
I don’t have equity. Can I still build a portfolio?
If you’re just starting out, your income is lower and you may not have any savings. But it may still be possible to secure a loan for an entry-level investment. While you complete your training and specialisation, you can hold the property and build equity.
How can we help to build your property portfolio?
- Some of our mortgage brokers are seasoned investors who have had experience building a property portfolio.
- We have over 50 lenders on our panel, each with varying policies that can cater to your investment goals.
- Our mortgage brokers know the lenders’ lending criteria and recommend the right investment loan product that suits your property portfolio needs.
- We can assist with the barrage of documentation and application forms you need to fill in.
- We will make sure you can meet your settlement deadlines without hassling you during the investment loan process.
- We will work out your financial situation and help to maximise your borrowing power.
Are you planning on building a property empire? Our mortgage brokers can help you on your journey. Call us on 1300 889 743 or enquire online.