6 tips for investing in property
It’s often said that Australian’s have a strong cultural preference for property investment for several reasons. Some the reasons for this include:
- strong historical capital growth
- tax benefits and government incentives.
- perceived stability of real estate
- high demand for rental properties
- financing options
- long term wealth building
- diversification
- leaving a financial legacy
Here are 7 tips when it comes to investing in property.
1. Selecting the right property at the right price
Generally speaking, investing in property is all about capital growth, so your choice of property with regards to it’s potential to increase in value is the most important thing to consider. Buying a property at the right price is critical.
The value of a property, unlike other asset classes like shares, can be difficult to price. Try not to be persuaded by real estate spruikers and agents who are often incentivised by large commissions which can result in a highly inflated property price.
Also never consider buying a property in an area that you are not familiar with.
Some properties offer the potential to accelerate the rate of capital growth too, by renovating or manufacturing additional incomes, for example adding a granny flat.
The property you select needs to be the right one for your goals and situation.
2. Understand the numbers.
Property investing is typically a medium to longer term type of investment, so you’ll need to make sure that you can maintain your mortgage repayments, and the other costs associated with the property such as council rates, property management fees and insurance.
You don’t want to find yourself in a position where you are under financial stress and need to sell it, and not when you are ready to.
It’s also worthwhile understanding if the property is currently achieving ‘market” rent- if it’s below there could be an opportunity to increase it and improve the properties cash flow. Further to this, conducting regular rental reviews (say every 12 months) goes a long way.
3. Use your equity.
Using equity in your home, or equity from another property investment, can be an effective way to buy an investment property.
Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage.
For example, if your home is currently worth $800,000, and you have $300,000 remaining to pay off on the mortgage, you have $500,000 worth of equity.
Also, using the equity in your existing home can allow you to borrow more money against your investment property, which will increase your tax deductions.
4. Negative gearing
Negative gearing can offer property investors certain tax benefits if the cost of the investments exceeds income it produces.
Australian law allows you to deduct your borrowing and maintenance costs for a property from your total income.
You can only get a tax benefit if you earn other taxable income in the first place. So, while you are actually making a loss on the property, the advantage is that the loss can be used to reduce the amount if tax on your other earnings.
Further, depreciation deductions reduce the investor’s taxable income, meaning they can potentially pay less in taxes. This is particularly helpful for property investors who rely on negative gearing, where the costs of owning the property (such as mortgage interest and maintenance) exceed the rental income, leading to a tax loss that can offset other income. You will need a depreciation schedule prepared by a qualified Quantity Surveyor to claim this.
However, don’t buy an investment property just to get a tax deduction.
5. Research and understand the market you are looking to buy in
We are fortunate to live in a country that is very large and diverse. There are many states, suburbs, streets that are available.
Before buying, talk to several local real estate agents, buyers’ agents, and even the neighbours! Try to gather as much intel as possible on things like growth rates, local development and infrastructure plans, proximity to schools, parks, transportation and shopping centres.
Not all houses, even on the same street have the same value.
Accessing independent information from a source such as RP Data can give you information on average rents, property values, demographics and suburb reports.
6. Find a good property manager.
A property manager is usually a licenced real estate agent that is a professional in their field, their job is to keep things in order for you and your tenant.
They can help you with ongoing advice and help you manage your tenants.
A good agent will conduct regular rent reviews and property inspections.
The property manager should be able to give you advice on property law, your rights and responsibilities as a landlord – as well as those of the tenant. They can also take care of any maintenance issues, although you should approve all incurred costs (other than certain emergency repairs), in advance.
If you would like to learn more about financing your property investment, please get in touch with us today, speak to our team today! call us (02) 7226 1222.
