What Is an Investment Property?

An investment property is a property purchased primarily to generate income or increase in value, rather than to live in. In Australia, investors commonly earn rental income while hoping the property increases in value over time. Property can therefore provide two potential sources of return: ongoing rent and capital growth.

One major advantage is that property can be purchased using borrowed money, known as leverage. For example, an investor might contribute $200,000 of their own money towards a $700,000 property and borrow the remainder. If the property rises in value, the gain is based on the value of the whole property, not just the investor's initial contribution. However, leverage works both ways, and falling property prices can magnify losses.

Investment Property: Advantages

Property is often viewed as a relatively tangible and long-term investment. Investors can physically own an asset while receiving rental income, and property values have historically increased over long periods in many Australian markets. Property may also provide some protection against inflation because rents and property prices can rise over time.

Another advantage is the potential tax treatment. Depending on the investor's circumstances, expenses such as interest on an investment loan, property management fees and maintenance may be deductible. Capital gains tax may also apply when the property is eventually sold, although the exact tax outcome depends on individual circumstances.

Investment Property: Disadvantages

The biggest disadvantage is the large amount of money required to get started. A property usually requires a substantial deposit, stamp duty and other purchasing costs. Unlike shares or savings accounts, it is also difficult to sell only part of a property when money is needed.

Property ownership comes with ongoing responsibilities and expenses, including repairs, insurance, council rates, property management and periods when the property may be vacant. Property prices can also fall, and a highly leveraged investor may continue making mortgage repayments even when rental income is insufficient to cover the costs.

Term Deposits and High-Interest Savings Accounts

Term deposits and high-interest savings accounts are much simpler investments. They generally offer lower risk and greater liquidity than property. A savings account allows money to be accessed relatively easily, while a term deposit normally provides a fixed interest rate for an agreed period.

Their main weakness is that the potential return is usually lower than the long-term growth investors may seek from property or shares. If inflation is higher than the interest earned, the investor's purchasing power can actually decline. They are therefore particularly useful for emergency funds, short-term goals and preserving capital rather than maximising long-term growth.

Shares

Shares provide investors with ownership of companies and can generate returns through both capital growth and dividends. Compared with property, shares generally require less initial capital and are much easier to buy and sell. Investors can also diversify across hundreds or thousands of companies through index funds or ETFs.

However, share prices can fluctuate substantially in the short term. An investor who needs their money during a market downturn could be forced to sell at a loss. Shares also do not provide the same physical, tangible asset that property does, although they offer considerably greater flexibility and diversification.

Which Investment Is Better?

There is no single best investment. Property generally offers leverage and the potential for rental income and capital growth, but requires significant capital and ongoing management. Shares offer strong diversification and liquidity but greater short-term price volatility. Term deposits and high-interest savings accounts provide greater stability and accessibility, but usually lower long-term growth potential.

The main difference is the balance between return, risk, liquidity and effort. Investment property can offer attractive long-term returns and the ability to use borrowing to control a relatively large asset, but it requires substantial capital and ongoing management. Shares and ETFs offer a much easier way to pursue long-term growth while maintaining liquidity and diversification.

Savings accounts and term deposits sit at the other end of the spectrum. They prioritise security and accessibility rather than high growth. This makes them particularly useful for emergency funds or short-term financial goals.

In practice, investors do not necessarily need to choose just one. A combination of cash, fixed interest, shares and property can provide diversification and reduce reliance on the performance of any single investment. A diversified portfolio can combine different investments according to the investor's goals, timeframe, risk tolerance and need for accessible cash.

Investment Option Potential Return Risk Level Liquidity Initial Capital Income Generated Main Advantages Main Disadvantages
🏠 Investment Property Medium–High Medium–High Low High Rent Potential capital growth, rental income, leverage and a tangible asset. Large upfront costs, loan repayments, maintenance, vacancy risk and difficult to sell quickly.
📈 Shares / ETFs Medium–High Medium–High High Low–Medium Dividends Easy to buy and sell, diversification and strong long-term growth potential. Prices can fluctuate significantly and investment value can fall.
🏦 Term Deposit Low–Medium Low Low–Medium Low Fixed interest Predictable return, relatively low risk and capital is generally protected. Lower growth potential, money may be locked away and inflation can reduce real returns.
💰 High-Interest Savings Account Low–Medium Very Low Very High Low Interest Easy access to money, low risk and useful for short-term savings. Interest rates can change and long-term returns are generally lower.
🪙 Bonds / Fixed Interest Low–Medium Low–Medium Medium Low–Medium Interest More stable than shares and can provide regular income. Lower growth potential and exposure to interest-rate and credit risks.
🏢 REITs Medium–High Medium–High High Low Distributions Property exposure without buying a whole property, easy to trade and relatively diversified. Market volatility and no direct control over the underlying properties.