Investment property FAQS
An investment property is a property purchased with the intent to generate income, make a return on the investment or both. To generate an income on an investment property, you would need to buy the real estate, rent it out and earn a rental income. To make a return on investment, the real estate would need to be purchased, then held, until the value of the property increases, then the property can be sold for a profit. In some cases, investors will buy property to generate an income through rental payments, then sell later down the track to make a profit on that property.
There are three major types of investment properties, residential property, commercial property, and mixed-use property.
Residential property is the most common type of investment property, a residential property could be an apartment, house, unit or townhouse. Residential properties are great for generating an income as tenants pay their rent monthly/weekly/fortnightly.
Commercial property is usually purchased by investors with the intent to rent out the property to businesses. A commercial property could be a warehouse, retail store or office. Commercial properties generally demand higher rental payments as well as higher maintenance and upfront costs due to size of property.
Mixed use properties are properties that can be a combination of commercial property types or commercial and residential. For example, a a mixed-use property could be a combination of a hospitality establishment and residential.
There are many advantages to investing in property, these include income, value, security, and tax deductions.
Investing in property can generate income through renting, this can supplement your own income or add income. If you purchase an investment property in the right location, you can maximise on the rental income. On top of rental income, investors have the ability to take advantage of capital growth. This is where the investor makes a profit during the sale of the property, after the asset/property has gained value. Renovating a property can stimulate capital growth and drive up its value. The advantage of investing in investment properties is that in comparison to other investments, it is far easier to invest in property. This is because unlike stocks and other assets, investing in property is far easier for people to understand and actually invest in that asset.
In general, investment properties are a much safer investment, they provide security as housing is always in high demand. Although there is no guarantee in regard to how the market will perform, property prices are far less volatile than other investments. Finally, expenses on maintenance, council rates and any other property management costs are all tax deductable at the end of the financial year.
There are some disadvantages when investing in property, which you may need to be cautious about. Investing in property is a long-term game, your strategy and objectives must suit the long-term game.
The first disadvantage is depreciation, there’s always the chance that the not only the value of the fixtures and fittings will depreciate over time, but also the building itself. In Australia it is common belief that housing prices will continue to rise, however this is not necessarily the case. If the investment property you purchased is in a poor location, you’ll have a non-performing asset in your hands.
Investment properties are also not as liquid as other investment such as stocks, this mean you cannot pull out cash straight away in the case of an emergency. The selling process takes time.
Other disadvantages of owning an investment property are general expenses such as maintenance, property management, interest and taxes. These expenses can pile up quickly, if you have problematic tenants than your maintenance costs could be more than usual.
There is a relatively large amount of property taxes that you can claim at the end of the financial year. These tax deductions can range from deduction on the interest you pay on home loan repayments, to the depreciation and maintenance of the property. For a full list of tax deductions please see below;
- Owners’ corporation fees
- Land tax deductions
- Property management
- Advertising costs.
- Council rates
- Legal expenses
- Letting fees
- Property agent fees
- Surveyor fees
Although there is a multitude of tax deductions you can claim on an investment property. There are some expenses that you can’t claim tax on. When you’re claiming tax deductions on an investment property you cannot claim expenses that the tenant pays for. For example, you cannot claim taxes on rental income or utility bills. Other tax deductions that you cannot claim on an investment property include stamp duty, capital gains and property inspection fees.
Investment property insurance which is also known as rental property insurance or landlord insurance protects you from a range of risks. It is not a legal requirement to take out investment property insurance, this is a decision for the investor to make. Like taking out any form of insurance, the investor must determine whether it is worthwhile or not. Some investors may not see the value of in the expense of insurance, as the insurance is there to cover eventualities that may never happen. Generally speaking, the goal of investors is to create wealth, why would you not want to protect your wealth through insurance? Although, if something were to happen that would require insurance, this could save investors from big bills that could otherwise be avoided.
When taking out investment property insurance, it is important to research the various insurance policies out there as investment property insurance coverage varies between insurance providers. The specifics in each policy may differ, however in most cases the policies will cover risks related to the building itself, properties content and the tenants.
Please see a list of general coverage below;
– Damage & theft
– Fire, Storm & Flood damage
– Rental payment default
– Vehicle collisions
– Legal expenses if tenants are taken to court
When purchasing an investment property, there are two ways to go about this, you can either buy or refinance your property. The investor needs to work out which option is the best for them. Each option has their advantages and disadvantages.
If you were to decide to finance your property the return on investment would be far greater than if you were to buy the investment property outright with cash. So even though your loan repayments may take profit from the rental income earnt on that property, due to strategies such as negative gearing, you’ll get more for the money paid.
On the flip side, if you paid for the investment property outright with cash, you would not have a mortgage to pay off, therefore your monthly income will be greater. The problem with this, is that you’ll need to have the capital to purchase the house from the start, it can take many years to build this kind of capital. Most people will need to finance a property as majority of people do not have $500,000 in cash assets available
This is where surrounding yourself with experts such as financial advisors and a mortgage broker would significantly help as they can assess your situation and determine what’s best for you.
When purchasing an investment property, you can use the equity in your owner-occupied property to do so. In order to do this, you need to work out how much equity you have available. To work out how much equity you have available, you need have your property valuated. Once you know the value of your home, you need to then contact the lender to find out how much you have left to pay on the mortgage of the owner-occupied property. Calculate 80% of the properties value, minus the amount owed on the mortgage and you’ll have the amount of equity that is available to use. You can use this equity to take out an additional loan on your owner-occupied property to fund the deposit for an investment property.
In order to use your superannuation to a fund a house deposit, you will need to set up a self-managed super fund (SMSF). SMSF’s are complex structures which are highly regulated, therefore you would need the appropriate advice before committing to anything regarding an SMSF. Industry super funds will not allow you to purchase investment properties using their super.
Regarding the purchase of investment properties, it is important to keep in mind that SMSF’s will have specific rules around how you can use the investment. For example,
The property must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members, not be acquired from a related party of a member, not be lived in by a fund member or relayed parties and not be rented by a fund member or related parties.
When purchasing an SMSF there are a range of charges that will reduce your super balance further, these include upfront fees, legal fees, stamp duty, property management, bank fees etc. There also specific rules around developing property using funds from a SMSF, we recommend that you seek out advice from a good mortgage broker and financial advisor regarding these specifications.
The top features in an investment property will vary depending on what the investor wants to achieve in term of the objectives and goals they have around wealth. Let us an answer this question for our average client.
When purchasing an investment property there are a few top features which will help you make a good return on the investment.
The first feature being location, location is the biggest driver for property and rental prices to rise. What determines a good location is strong population, safe environment and a good economy.
The second feature being infrastructure, this includes schools, public transport, roads, business districts and any future infrastructure programs that have already been planned for that location.
The third feature is to purchase a property that is new or near new. Older properties have little depreciation and have more maintenance costs. A new property can will suffer from depreciation and drive cash flow through that tax deduction.
There are other minor features to take into consideration when looking for an investment property such as price brackets and the balance between yield and capital growth.
Capital growth is the key to returning a decent profit when investing in property. Although being able to negative gear and obtain a positive cash flow is nice, there name of the game is capital growth. When looking for an investment property, the best investment is one that has a good balance between capital growth and the yield of positive cash flow. Achieving a good balance between these two can assist those investors looking to build a portfolio. However, this may not be the best strategy for all. For example, a retiree may not be interested in capital growth, rather, they may be interested in yield over capital growth in order to fund their retirement.
Before you conduct any research into investment properties, it is important to figure out what your goals are in regard to investing in property. By doing this, you can put boundaries in place and therefore save a significant chuck of time by only conducting relative research.
The best way to conduct research on an investment property is to surround yourself with experts. This could be by contacting real estate agents, mortgage brokers and any other advisors or investors who have experience investing in property.
An alternate way to find a suitable investment property is to conduct web-based research. This could be through conducting research on platforms like CoreLogic Property Hub, realestate.com.au, domain.com.au and the many other property blogs/platforms that are out there. Do not take advice from anyone who has not invested in property before, if they have never invested in property, how do you expect them to give you reliable up to date advice?
Investor’s should always be looking ahead and budgeting for interest rate increases. If you have any other additional debts or repayments, you will also need to factor this in, as the interest rate on all your debts/loan will rise unless fixed.
If you’re on a variable home loan rate, the interest rate will go up and down based off the decisions made by the RBA. When looking for the right home loan product, the lender has a responsibility to take into account increasing and decreasing interest rates.
Building on your property portfolio can happen as quickly or as slowly as you would like, depending on how much the lenders are willing to lend. To expand your investment portfolio, you must understand the strategies behind investing and how the strategy for the investment property you’ve already purchased is working. Once you have done this, you can work out your borrowing capacity for future investments. When growing an investment portfolio, using a good mortgage broker is essential. Brokers can assist with investment strategies and are usually steps ahead when it comes to these strategies. Not only can good mortgage brokers help with strategy, but they can also help determine what you can and can’t achieve in terms of investing in property.
Many investors may not be able to play the role of property management due to workload and distance from investment. This is where hiring a property manager is beneficial. The property manager will do all the heavy lifting for the investor in terms of rental issues. For example, they can find and review tenants, collect rent and organise repairs. The question the investor needs to ask themselves is, if the relationship with a tenant grows sour, do you want to spend your time dealing with this or would you rather have someone who is experienced do this for you? How much is worth the stress of property management?
This choice comes to down personal preference and whether or not you’re at a stage where you can afford to hire property management.
Majority of renovations aren’t completed on time and come in over budget. Before working out how you can retrieve funds for renovations, you need to work out what it is going to cost.
There is a multitude of ways that you can retrieve funds for any renovations that you may need to be done on the property.
The first way to retrieve the funds is to access and use the equity in the property. You could also top up or redraw on your current loan. You may be able to borrow additional funds on your existing home loan without having to take out a separate loan. If you have made additional repayments on your current home loan, with certain lenders, you may be able redraw those funds in order to fund the renovation. In the case that these options are not suitable for you, you also have the option of refinancing the home loan. Refinancing your home will give you a greater borrowing power to afford the funds needed for renovation. Finally, the least favourable option would be to take out a personal loan, this would be the least financially beneficial option.
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