While it’s hard to predict where the housing market will head beyond 2012, there are some clear signals that investing in property will remain a solid option for long-term wealth generation — and now is a great time to buy.

One of the key factors to consider is the demand for housing. Right now, Australia faces a housing shortage, with home ownership on the decline and renting on the rise. While some argue it’s partly due to people marrying later in life and preferring to rent rather than be tied to a mortgage, the more likely reality is that many first-time buyers have found it harder than previous generations to save a sufficient deposit, thanks largely to the increased cost of homes.

At the same time, our population continues to grow (more than eight per cent in the past five years, according to the Australian Bureau of Statistics), rental markets remain tight, interest rates are low and house prices have dropped about five per cent on average in the past five years.

Opportunity is knocking for those with equity in their home who are looking to invest in property. But there are some key facts to consider before you open the door.

RENTAL RETURN OR CAPITAL GAIN?

It’s important you decide what you want from your investment as this is likely to determine what type of property you buy and where.

Are you looking for maximum rental return or are you prepared to negative gear (where any losses help reduce your taxable income) and aim for capital growth over the longer term?

Whether it’s cash flow or capital gain you are after, be careful not to over-stretch, particularly in the current environment. Negative gearing has its pros for tax purposes but cash flow is still king when it comes to day-to-day living, so aim to strike a balance between your immediate rental return and longer term goals.

TIMING

One of the benefits of investment property is that you can choose to sell when the market is high, and buy back in when it flattens. Most of us don’t have this luxury with our own homes because we need somewhere to live. We tend to sell and buy in the same market.

Now may not be such a good time to offload an investment property, but it could be a good time to acquire, with a view to building a healthy capital gain when the property cycle turns around.

LOCATION

Choosing the location of your investment property is very different to deciding where you will live. Tenants are often looking for very different things to owner occupiers. The first is usually convenience. Look for properties near good amenities, particularly shops and transport.

If you are looking for solid rental returns right from the get-go, consider a unit or townhouse in an affordable suburb with a high percentage of renters and low vacancy rates. Inner-city properties may be too pricey, but you can often find well-priced, easy-to-rent properties in suburbs close to universities and hospitals, full of students and workers eager for convenience.

If capital gain is more important, look for properties in suburbs that are next to those that are already in demand. Over time, the amenity and appeal of one suburb tends to creep into the next, pushing up prices.

NEW VS OLD

New properties require less maintenance and generally carry increased tax benefits but older properties still have their advantages, especially if you are looking to add value with improvements or renovations (see our Renovate Right article).

One of the key tax advantages of buying properties built after 1988 is depreciation, where wear and tear is accounted for and offset against your income tax. It applies to the external structure and internal fixtures on a property, so even if your rental is pre-1988, you may still be able to claim depreciation for any renovations, including those undertaken prior to purchase.

To claim this tax benefit, you need to have a depreciation schedule prepared by a qualified quantity surveyor. This generally costs anywhere from $300-700, with many companies promising your money back if you are unable to claim back at least the cost of the survey in depreciation in the first year.

RESEARCH

Prior preparation and planning are the keys to property investment, no matter where or what you buy. Research the area’s sales history and also look ahead by finding out if there are plans for nearby infrastructure, such as public transport, major road improvements, hospitals, schools and parklands.

Find out what various properties rent for and check out demand by researching the area’s vacancy rates and inquiring how many applications have been lodged for advertised properties. Posing as a renter is also a clever way to get some inside knowledge and find out what tenants are looking for.

Tax information: the information contained in this article does not constitute advice. As taxation legislation is complex, we recommend you speak with your tax advisor or contact the ATO for further details and expert advice in relation to your personal circumstances.