Why buy an investment property?
Are you thinking about buying an investment property? You aren’t alone. Australians are said to be “obsessed with property and seemingly more than other countries” (Morningstar 2023).
Investing in property offers many benefits including tax deductions but there’s a lot to learn.
Benefits of property investment
- Financial Returns
Residential property has performed wonderfully over the last 50 years. Whilst there have been some short-term downticks, the long-term growth rate of the average property is 6.3%. This is largely due to due to surging migration, limited supply, tax incentives, increasing city density, reduced people per household, and relatively low interest rates.
In addition, if your property is tenanted, you will earn rental income. This income can help you cover mortgage repayments and the costs of owning an investment property. According to CoreLogic, the average weekly rent in Sydney is currently $745 per week.
- Tax deductions
Investment property expenses are generally tax deductable which can save investors a lot of money. Some of the tax deductions that property investors can claim include:
- Home loan interest payments
- Repairs and maintenance
- Costs of property management
- Council rates and land tax
- Body corporate and strata fees
- Insurance
- Administrative costs.
- Leverage
Investing in property offers the opportunity to borrow funds to buy an investment. Although some lenders restrict the amount of money you can borrow, you could be able to borrow up to 90% of the value of your property.
Borrowing money to purchase offers the potential to amplify your investment returns (and losses).
Considerations for property investment
- Tax
Investors should also be aware of capital gains tax (CGT) that may be charged when selling an investment property. CGT is a tax that’s charged on any profit you make after selling your investment property. However, if you wait at least 1 year before selling your investment property, you’ll get a 50% CGT discount.
Any rental (income) you receive must be declared on your income tax return and is considered taxable income. However, any eligible tax deductions can be used to offset your rental income.
- Interest rates
Interest rates for investment loans are generally higher. However, the interest expenses associated with your investment property are tax deductible.
If you have a variable interest rate, you can expect your mortgage interest rate to fluctuate somewhat. If interest rates rise, this could negatively affect your cash flow.
Investors who like stability regarding their home loan repayments might prefer to opt for a fixed interest rate.
- Difficult tenants
It’s possible that you might experience a bad tenant who damages your property, are late with rent or refuse to pay, or perhaps they are disruptive to neighbours.
Having difficult tenants like this could result in high costs and stress, but there are ways to prevent these issues:
- Using a property manager: when you hire a property manager, they take care of the day-to-day rental management. They’re experts in the local market and know how to select good tenants. Plus, if there are any issues, the tenants will contact them first.
- Get landlord insurance: having good landlord insurance can give you the assurance that your property will be taken care of if things go wrong.
- Landlord inspections: don’t go too long without inspecting the property during tenancy.
- Know your rights and responsibilities: know what your legal obligations are as a landlord, but also what your rights are.
- Choose your rental rate carefully: select a competitive rental price for your property as you are more likely to attract sensible, ordinary tenants, rather than those chasing unusually cheap rentals.
- Property vacancy
Simply owning an investment property won’t guarantee tenants all the time. Some investors even go through long periods where their property is vacant.
If you are going to be relying on rental income, select the type and location of your investment property carefully.
Properties in lively areas with plenty of amenities, public transport and schools are likely to have higher rental demand.
Not being able to find tenants could mean that your property becomes negatively geared. While this won’t suit the goals of all investors, it does mean you can write your losses off on your tax return.
3 tips for property investors
1. Property selection
Take your time when selecting your investment property.
Property has a high entry price (deposit, stamp duty, fees etc), will cost you money ongoing and could be difficult to sell at a “good” price. Selecting the “right” investment with the potential for capital growth and/or income return is essential so that you can achieve your property investment goals and not finding yourself in a situation where the investment isn’t performing the way you expected it to.
We recommend researching several locations and properties and look for quantitative data from reliable sources to identify areas where there is likely to be strong demand in the future. Alternatively, you could engage the services of a property buyer.
2. Structuring your loans
When applying for an investment loan, it’s important to structure it and your other loans so that it’s aligned to your goals.
You have many options like principal and interest repayments or interest only, variable rate, fixed rate or split rate loans, basic loan or packaged loan, and it can be difficult to know what the best structure is for you.
Principal and interest repayments have the benefit of paying off the money borrowed but will come with a higher repayment meaning you’ll have less money left over for your property’s expenses. Interest only repayments will have a lower repayment, but your repayment isn’t going towards paying off the money your borrowed.
Variable rate loans will fluctuate, whereas a fixed rate loan will give you certainty over what your repayments will be for the fixed period.
Packaged loans come with fees but also provide benefits like an offset account. Whether to offset investment loan interest (which is tax deductible) is something to consider.
Speak to professionals like finance strategists and accountants to get the structure right for you.
3. Frequent Review
Reviewing your property investment(s) regularly is critical to achieving your goals. We recommend that you review your property investment(s) at least once a year.
Your review at a minimum should include:
Rental income- there may be an opportunity to increase your rent.
Investment Loan- ensure the structure of your loan(s) are still aligned to your goals.
Buy/Hold/Sell- Review the properties in your portfolio and decide whether to hold, sell or add to it with a new purchase.
Maintenance/repairs and uplifts- Any maintenance, repairs and improvements could add value to your investment property and improve your rental return and expenses related to maintenance and repairs are generally tax deductible.
Valuation- Regularly valuing your property investment(s) can identify any improvement to your equity positions and unlock opportunities for additional investments.
There’s lots to consider when it comes to property investment. If you’re feeling lost, have questions or want to learn more about your home loan options, book an appointment with us today.
Sources
https://www.morningstar.com.au/insights/personal-finance/235793/why-australia-is-obsessed-with-housing
