Why Invest in Property?

What you'll learn in this step is to discover the potential tax benefits of property investment.

Investment properties have many benefits when it comes to building long-term wealth, but this wealth is not always guaranteed. As a means of diversifying your exposure to different asset classes, property can be less volatile than shares (although not always) and tends to be the haven investors rush to when other assets suffer.

While it has lost its gloss since the boom times of the late 1980s, sensible investments in property have many attractions.

All investments need a benchmark to measure performance against. Residential property isn't any different, yet few investors monitor their returns, reports Susan Hely. Your first investment in property doesn't always have to be something you live in.

Indeed, buying a small apartment to rent out can be a good way to accumulate a big enough nest egg so you can eventually buy your own place. Generally, investing in real estate gives you access to two benefits:capital growth and the tax advantages associated with negative gearing.

What is Capital Growth?

Capital growth is the money you make as the value of your property appreciates.The larger cities – especially Sydney and Melbourne – have enjoyed occasional boom periods that have seen many home owners with properties that have sometimes doubled in value during these times. While there's no guarantee your property will gain in value, historically property has experienced steady growth.

What is Negative Gearing?

Gearing basically means borrowing to invest. An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared as you are able to deduct the costs of owning an investment property from your overall income.

The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs. Because negative gearing deductions offset your income, they are most beneficial to high-income earners. What this means is the more you borrow, the more interest you pay and the bigger your deduction.

While everyone wants a large tax deduction, you shouldn't overcommit yourself in order to get one. You still have to make the mortgage payments and those lucrative tax benefits don't arrive until the end of the financial year. In periods of low inflation, the benefits of negative gearing are usually negligible.