Investing In Property

Before you make your move, you should always consider the advantages and disadvantages of investing in property.

Pros

• Safe investment: Historically, property holds its value very well, with ever-increasing demand as the population grows.
• Rental income: Rental properties in attractive locations can generate great rental income.
• Capital growth: If you benefit from key growth drivers in the area, your property’s value is likely to increase over time.
• Minimal risk: Your property can be insured against most risks (e.g. fire damage, theft, tenants who break the lease etc.) so you can sit back and relax.
• Open to anyone: As long as you do some research, you don’t have to be a property investment maestro to get started
• Control: When it comes to your property, you get to make all of the decisions. You even have control over the returns you receive.
• Tax benefits: If you’re using a home loan to purchase the property, you may be eligible for multiple tax benefits.

Cons

• Rent-free periods: There may be times when you can’t find a tenant and the property will remain vacant. This means you’ll need to plan for the costs yourself over that time.
• Liquidity: It can be pretty difficult to sell a property as quickly as other investment types, such as shares.
• Tenants: Sometimes, tenants can damage the property and refuse to pay for any fixes, which can lead to stressful disputes.
• Ongoing costs: These include property maintenance and repairs, as well as all of the necessary insurance, tax, water and council rates.

When borrowing for any reason, you need to take your budget and cash flow into account, leaving a buffer for any unforeseen expenses or interest rate fluctuations. Once you’ve worked this out, it’s relatively simple. Your property’s value should rise and generate equity over the long term.

Using home equity to purchase your investment property

Equity is the difference between what you owe on a property and its market value. If your home is valued at $300,000 but you only owe $200,000, then you potentially have access to $100,000 by refinancing your loan. Using your home equity as a deposit is a fantastic way of securing funding for an investment property.

Learn more about home equity here.

Purchasing an investment property with your superannuation fund

It is possible to use your self-managed superannuation fund (SMSF) to purchase an investment property. Before you go ahead with this option, get in touch with an accountant or financial planner to discover:

• What you are permitted and not permitted to do with your SMSF
• The advantages of using your SMSF to buy an investment property
• The risks and downfalls of such an investment
• The appropriate trust structures to use
• Strategic tax planning and deductions

Buy, renovate and sell

Some investors build equity and make profits quickly by purchasing run-down properties to renovate and sell at a higher price.

To do this successfully, you must consider a range of factors, including agent fees, stamp duty and market trends. You will also have to increase the property’s value significantly to make any profit. This is due to capital gains tax, which is payable whenever you sell an asset that has risen in value since you purchased it.

If you want to take on the challenge of flipping a property, make sure to carry out a building and pest inspection before you purchase. These inspections identify any structural issues or pest damage to the building so that you can avoid buying a property that requires repairs beyond your financial capacity. A building and pest inspection report can also be used as a bargaining tool for price or contract negotiations, so you’ll get the best value for your money.

Make sure you fully understand the expenses of owning an investment property because they’ll influence both your budget and net profit.

What’s more, only some of these costs can be claimed back in tax.

Council and government taxes

These state-specific costs are unavoidable so make sure you know the rates set in your area.

Strata rates

These body corporate fees tend to be paid on a quarterly basis to help fund the maintenance of the property and its surrounding areas.

Property compliance

Under national residential tenancy laws, landlords are required to ensure that rented premises are kept in good condition. This includes all gas and electricity, which must be properly maintained and safe to use. So, don’t cut any corners here.

Property management fees

A property manager costs roughly 7-10% of the total rental income but this service fee is usually tax deductible.

Repairs and maintenance costs

This expense varies according to the property, with newer properties requiring less upkeep. However, make sure you have additional funds stored away in case you have to pay for any emergency repairs.

When it comes to property investment, the terms ‘positive’ and ‘negative’ gearing are thrown around a lot. So, what exactly are these strategies, and how might they impact your profits?

There are three kinds of gearing:

1. Positive gearing occurs when your rental return exceeds your interest repayments and outgoing costs.
2. Negative gearing happens when your interest repayments and outgoing costs are higher than your rental return. This strategy is used to minimise tax, as any losses tend to be deductible.
3. Neutral gearing is when your investment property earnings equal your interest repayments and any other outgoing expenses.

Why is negative gearing the most common strategy?

The main reason that people opt for negative gearing is that any losses made on your investment property can be used as a tax offset against any other income earned. Therefore, you reduce your taxable income and in turn your tax payable.

Other investors go for negative gearing to maximise their tax returns and take advantage of long-term capital growth potential. On the flip side, people reaching retirement age or earning lower incomes often select positive gearing to maximise their income.

Our experts will structure your loan in the best way possible to secure financing for your investment property, but you’ll have to speak to an accountant for tax advice. If needed, we can introduce you to some very trusted, reputable tax professionals.

It’s your responsibility to manage your investment property, whether you handle it yourself hire a property to manage to take care of it for you. Both strategies have benefits and drawbacks.

If you manage the property yourself, you won’t have to fork out any management fees. However, you will be solely responsible for controlling every aspect of the property, including compliance with any laws and regulations.

If you hire a property manager, the fees are tax deductible so you won’t have to worry about issues like finding tenants, collecting rent or dealing with tenant disputes.

The property manager is responsible for:

• Understanding and complying with rental laws
• Finding appropriate tenants, which includes showing the property to potential tenants and conducting reference checks
• Creating a residential tenancy agreement and completing a conditions report
• Obtaining a bond and rent advance from new tenants
• Reviewing rental prices and chasing any late rent payments
• Organising building and pest inspections
• Ensuring all required utilities are installed and maintained in good condition
• Arranging required repairs, maintenance and renovations

Most property manager’s fees include an initial payment of the first month’s rent and then a percentage of the rent on an ongoing basis. They may also charge additional fees for administration duties, inspection costs and advertising.

So, is it worth the expense? We’ve included some benefits of hiring a property manager below:

• It’s their job to secure suitable tenants and rental income
• Property managers deliver fast results, so you’ll start pocketing rental income sooner rather than later
• They’ll take care of any emergency, day or night, so you don’t have to
• Overall, there’s far less work for you

What should I ask a potential property manager?

When hiring a property manager, you should use a local company with a strong network of reputable tradesmen. It’s important to feel confident that one of your most valuable assets is in the best of hands.

Here are some questions to ask a potential property manager to make sure they’re the one for you.

• Do I approve the tenant or do you?
• What will happen if I decide to sell my property?
• How do we determine the rental price?
• How many properties do you manage that are currently in rental arrears?
• How can I be certain that my property will be looked after?
• Do you conduct regular property inspections?
• What will happen if a tenant refuses to pay their rent?
• What will happen if a tenant damages my property in any way?