Houses and units seem easier to understand than many other types of investments. However, it's important to understand how investing in property works, to decide if it's right for you.

Pros and cons of investing in property

Property investment is often seen as being less risky than other forms of investment. However, while it may seem more straightforward, there are pitfalls to be aware of. Here's what you need to consider about investing in property.

Pros

Less volatility – Property can be less volatile than shares or other investments.

– Property can be less volatile than shares or other investments. Income – You earn rental income if the property is tenanted.

– You earn rental income if the property is tenanted. Capital growth – If your property increases in value, you will benefit from a capital gain when you sell.

– If your property increases in value, you will benefit from a capital gain when you sell. Tax deductions – You can offset most property expenses against rental income, including interest on any loan used to buy the property.

– You can offset most property expenses against rental income, including interest on any loan used to buy the property. Physical asset – You are investing in something you can see and touch.

– You are investing in something you can see and touch. No specialised knowledge required – Unlike some complex investments, you don't need any particular specialised knowledge to invest in property.

Cons

Cost – Rental income may not cover your mortgage payments and other expenses.

– Rental income may not cover your mortgage payments and other expenses. Interest rates – A rise in interest rates will mean higher repayments and lower disposable income.

– A rise in interest rates will mean higher repayments and lower disposable income. Vacancy – There may be times when you have to cover the costs yourself if you don't have a tenant.

– There may be times when you have to cover the costs yourself if you don't have a tenant. Inflexible – You can't sell off a bedroom if you need to access some cash in a hurry.

– You can't sell off a bedroom if you need to access some cash in a hurry. Loss of value – If the property value goes down you could end up owing more than the property is worth.

– If the property value goes down you could end up owing more than the property is worth. High entry and exit costs – Expenses such as stamp duty, legal fees and real estate agent's fees.

There are restrictions on buying property through a self-managed super fund (SMSF). See SMSFs and property for more information.

Diversify your investments

Invest in more than just property so your money isn't all in one market. If you invest in one market, it'll increase your risk and means your portfolio isn't diversified. See choose your investments for how to find other investments to help you reach your goals.

Costs of investing in property

Buying, managing and selling an investment property can be costly and will affect your overall return.

Cost to buy and sell

Some of the costs involved to buy and sell a property include:

stamp duty

conveyancing fees

legal costs

search fees

pest and building reports

If you sell your property, you will have to pay agent's fees, advertising costs and legal fees. You may also have to pay capital gains tax if the property has increased in value.

Borrowing money to buy

If you borrow to invest, you will have to pay the property mortgage. Don't rely on rental income to cover the mortgage – there may be times when your property is empty.

Many people buy investment property with interest-only loans, but remember the interest-only period will end after a certain time. This means your repayments will increase to pay the amount borrowed, plus the interest. See interest-only home loans to find out how they work.

Interest-only mortgage calculator See what an interest-only loan will cost you.

Costs to own an investment property

Ongoing costs of investment properties include:

council and water rates

building insurance

landlord insurance

body corporate fees

land tax

property management fees (if you use an agent)

repairs and maintenance costs

Tax on your investment property

Although you may be able to claim tax deductions on expenses, you'll still have to pay them up front. For positively geared investments, you may pay tax on your rental income.

Visit the Australian Taxation Office (ATO) for how tax works for investment properties.

What to consider when buying an investment property

Once you have a property in mind, compare the income you expect to your outgoing expenses. If there is a shortfall, consider whether you can cover it long-term. Also, work out whether you could cover all expenses short-term if you had no tenants for a while.

Research the property market to decide how to get an investment property. Where and what you buy will affect your return on investment.

Where to buy

Areas you're familiar with will take time to research.

Look for areas with high growth, higher rental yield and low vacancy rates.

Find out about proposed planning changes in the suburb that may affect future property prices.

What to buy

Look for properties with appealing features like a second bathroom, a garage and access to schools, shops and transport.

Consider maintenance costs based on property type, age and features.

How to buy

Be wary of property investment advice from groups of service providers. Property developers, accountants, lawyers and mortgage brokers might recommend each other's services.

You may have heard of property investment seminars promising to make you a fortune. These events often use high-pressure sales tactics to rush you into making big property investment decisions. Find out how to spot the warning signs of a dodgy investment seminar.

Overseas property investment

Investing in overseas property is more risky than investing in property in Australia. It's harder to manage a property from afar and there may be costs that you haven't thought of.

Here are some things to consider before you invest:

Distance – Good tenants and property managers are hard to manage when you're so far away

– Good tenants and property managers are hard to manage when you're so far away Renovations and repairs – You can't supervise repairs or know who does the work

– You can't supervise repairs or know who does the work Extra costs – You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. If you buy through a promoter, there may be other hidden costs

– You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. If you buy through a promoter, there may be other hidden costs Exchange rate – Changes could affect the amount of income you receive