Information about Property Investment
Why invest in property?
Investing in property can be a great way to build long term wealth through the capital growth that can be experienced with well chosen properties.
Historically, house prices have tended to double every seven to ten years and regardless of whether you’re looking at buying your first investment property or adding to an established property portfolio, it’s critical to get not only a suitable loan but the right structure and we can work with you to establish your goals and plans for the next few years and to understand just what is important to you.
Successful property investing does involve looking at a number of different factors and whilst many of these have been covered in broad terms below, it is a subject that is certainly best handled in a face to face appointment.
Negative gearing vs Positive gearing
Negative gearing exists when the cost of owning an investment exceeds the income received from it. When talking about an investment property, it means that the tax deductible expenses and interest costs exceed the gross rent received for that property. In general terms, this would generally result in the taxpayer being able to reduce their taxable income and therefore the amount of tax that would otherwise be paid.
Positive gearing, on the other hand, is where the income received is greater than the total amount of the expenses and therefore creates a situation where tax must be paid on the net income.
On the face of it, positively geared property does not usually provide the same capital growth as you would get from negatively geared property but the choice of which is a better strategy is a very much debated topic!
Depreciation is an accounting term used to describe the general wear and tear of an asset. When talking about an investment property, depreciation can apply to both the actual building as well as to contents such as the oven, air conditioning and so on.
In an apartment or townhouse complex, you can also include depreciation on the common property such as swimming pools, gymnasiums, water tanks etc.
A Quantity Surveyor is needed to prepare the Depreciation Schedule.
Depreciation is an important factor in property investing as it allows an investor to increase the expenses of owning the investment property (without having to actually pay any more) and therefore reducing the profit (or increasing the loss). This allows the property owner to pay less income tax.
Depreciation diminishes over time so the newer the property, the higher the amount of depreciation.
Further information can be obtained from the ATO website.
Managing your property
There are two main avenues available for managing an investment property – utilising the services of a professional property manager or deciding to manage it yourself.
There are arguments for both but the ultimate decision is whether you feel that you could handle the issues that could arise from time to time such as negotiating new leases, sorting out repairs or probably the biggest one – tenants in arrears.
If you do decide to utilise the services of a professional property manager, then you should understand that there may be some items in the management agreement that are able to be negotiated.
- Management Fees;
- Notice for Termination;
- Limits on cost of repairs that can be arranged without prior approval.
The second of these is particularly important because if you are unhappy with the management of the property, you would want to hand it over to a new property manager as quickly as possible.
Treat it like a business
One of the biggest mistakes that property investors make is that they get too emotionally involved in the whole aspect of the property investment and fail to treat it as a business.
Many people buy an investment property in their own backyard so that they can visit it and watch it and this is OK if you are in an area that is providing excellent capital growth or good rental yields but otherwise avoid your own backyard.
It is possible to buy an investment property out of the area that you live in and to have it successfully managed without ever having seen the property.
Don’t buy a property just because you would like to live there. Look at the features that would make it attractive. Is it close to amenities such as schools, shops or transport? And be prepared to walk away. This is especially the case if you are looking at buying new or off the plan and the valuation comes in below what you have paid. There are plenty of other investment properties available and if the one that you are looking at is starting to sound not right, then look elsewhere!
If you are looking at a strategy that involves multiple properties, you need to be aware of the potential for land tax. This is a State Government levy that applies when the value of land owned exceeds certain thresholds. There are some exceptions and it does vary from state to state. Futher info can be found on the OSR website for each state.
The cost of owning an investment property
Unless you buy an investment property that is positively geared, then it will cost you money to own the property.
This is not necessarily a problem in that for a well chosen investment property, the capital growth that you receive normally compensates for this cost but it is important to make sure that you understand the likely impact on your finances. A negatively geared property will also become positive over time.
This is something that we can work through with you to understand as failing to do this may mean that you end up having to sell a property as you are not able to cope with the repayments.
We can help you identify the costs involved so that you can determine if a property is within your budget.
There are also other strategies used by many investors that can see your own home loan paid off sooner and we can also help you with understanding these.
Buying a property in a Trust
Many people prefer to buy their properties in a Trust. There are different reasons for this and whilst this doesn’t pose any problems with borrowing, you really need expert legal and financial advice to see if this is right for your situation.
Problems with multiple properties
One of the problems that many property investors encounter is that they find that it is harder to get finance as they continue to grow their property portfolio.
This is because most lenders only take into account between 75% – 80% of the rent that you are receiving when looking at your borrowing capacity but this is not the case with all lenders and there are some that will take the total rent being received.
It is important when getting finance that your overall strategy is considered and that you use the right lender and that you have the right loans in place.
Properties should not be cross collateralised as this can lead to problems later on.
We also believe that it is better to have your properties spread over several lenders rather than just the one.
This is an abolute essential.
We have all heard of owners losing thousands over unpaid rent or damage to the property from tenants.
For a few hundred dollars, this will give you peace of mind that your investment is safe but please make sure that you read all terms and conditions of the policy so that you do understand the detail.