April 21, 2011
Investing in real estate can have its disadvantages, not least when you have troublesome tenants. And with yields on residential investment property now averaged at 4.5 percent, there are growing questions about whether investing in property is really worth it.
By comparison, the average term deposit interest rate for a 12-month term on a balance of $100,000 is 5.97 percent, while the average 12-month term deposit on a balance of $50,000 yields 5.99 percent. But there are a number of institutions offering rates of up to 6.70 percent for 12-month terms for a balance of $50,000.
Of course the decision to invest in real estate or a term deposit is more complex than calculating yield, what with tax benefits, liquidity and long-term investment strategies to take into consideration among other things.
So here's a snapshot of the advantages and disadvantages of both real estate and term deposit to get you on your way to understanding the best investment type for your situation.
Advantages of property
Property has proved to be a relatively secure investment over the past decade in Australia, with returns above 8 percent in some metropolitan areas. These are some other benefits of investing in property:
- There are tax benefits such as interest paid on the loan, repairs and maintenance, rates, taxes, insurance, agent's fees and depreciation.
- Negative gearing is possible, where the costs of keeping the investment property exceed the income gained from it.
- It's a long-term investment. Many people like the idea of an investment that can fund them in retirement. Rental housing rarely decreases in price, making it a good potential option for long-term investments.
Disadvantages of property
By choosing a property carefully, this form of investment can be lucrative. However, as with all investments, there are disadvantages to be aware of.
- They're liquidity assets so you can sell if necessary. But the selling process can take months to achieve your desired value.
- There may be times when you're without tenants. This mean you'll be required to cover mortgage repayments from your own pocket.
- Bad tenants can leave your property severely damaged or you out of pocket if they refuse to pay rent or leave.
Advantages of term deposit
The main advantages of an average bank term deposit include:
- They're low risk. It's a relatively risk-free investment, so there's little chance that you'll lose money.
- The rates are good. By comparing term deposit interest online at websites such as RateCity you can ensure you're getting above average bank term deposit rates too.
- The security is good. The interest rate is fixed, so will not change over the term you select.
Disadvantages of term deposits
But term deposits have their downside too:
- It's not a liquid asset. You can't easily access your finances without incurring fees.
- They lack flexibility. Term deposits may be less flexible and provide lower income than comparable products.
Whichever you choose, it's a good idea to compare investment options before you invest, so you understand your financial commitment and maximise your final balance.
Related term deposit links