Purchasing Your Investment Property

///Purchasing Your Investment Property
Purchasing Your Investment Property 2017-10-18T15:50:16+00:00

WHY INVESTING IN PROPERTY MAY BE THE ANSWER

Australia currently faces a chronic housing shortage which, coupled with a rapidly expanding population (through natural increase and immigration), has pushed rental vacancy rates to historic lows and put upward pressure on rents. There are simply not enough houses to go around.

An investment plan is one that works towards building your wealth and securing your financial freedom. For some, the future may seem a long way off, but the time to act is now because the future waits for no one. The housing market is generally a seven to ten year cycle: there are always highs, lows and steady patches.

The decisions you make today will determine the lifestyle choices you have in the future.

The following factors should be taken into consideration when purchasing property as an investment:

  • The likely return – yield and capital growth
  • Buying and selling costs
  • Cost to borrow money, ie interest rates
  • How attractive the property will be for likely tenants or future buyers.

DO YOUR HOMEWORK

First you need to work out how much you can borrow. This is where our services will really help you. Make sure you have an accurate and detailed budget that takes into account all expenses associated with purchasing a property including stamp duty, council rates and other fees. Ensure you go to many open inspections and do your researches on the internet before purchasing to ensure you have a good indication on property prices in your desired location. Find out the area’s average rental yields and the services infrastructure in place and planned. Also research the property price growth that has been experienced and what is expected. Invest the time to fully understand the market – it could make a big difference to future investment returns.

A mortgage is a big commitment and you may have to make changes to your regular spending practices if you are to meet your repayments with ease. Include water and council rates and items such as insurances and maintenance in your planning phase. Don’t forget your property management fees if you are considering having your property professionally managed. Your accountant may also take the opportunity to charge you more for the extra work in preparing your tax return. However a good accountant is worth their weight in gold.

Interest rates move constantly, so you will need to allow room in your budget for interest rate increases and other unforeseen additional spending. When interest rates drop, simply maintaining the same repayments is one of the fastest ways of paying off more of your loan and building a buffer if they rise again.

Think very carefully about the different loan product offerings available and how these relate to you and your spending and saving habits. Consider options such as an offset account that will enable you to take advantage of using any excess cash to save on interest. It’s also a great account to use to save for your next investment property.

Plan ahead – you may find a long-term tenant or you may find that your tenants come and go. Make sure your cash flow is sufficient to cover the mortgage and other outgoings if the property is empty. Don’t think that you always have to increase the rent either. Sometimes it is more cost effective to have the same long-term tenant in your property than have weeks of vacancy trying to achieve a higher rental yield.

Every property will have compromises, but don’t miss a good opportunity because you are waiting for the ‘perfect’ house or apartment. If it sounds too good to be true, it probably is.

Your selection criteria should include:

  • LOCATION: is it close to schools, shops, day care and sporting facilities?
  • TRANSPORT: is it close to bus stops and train stations?
  • DEMOGRAPHICS: especially population numbers, growth and density.
  • SUITABLITY TO RENT: are the rooms big enough and are there usable living spaces inside and outside and other features such as garaging and storage?
  • FUTURE POTENTIAL: can the property be renovated or developed? Are there any plans to develop surrounding properties, eg high density dwellings?
  • AFFORDABILITY: stay within the second and third quartile of prices in the suburb for price and rent.

TAXATION – POSITIVE VS. NEGATIVE GEARING

Even with an uncertain economy, rental yields are still expected to continue to increase inmost capital cities.

As the population in these cities continues to grow, demand for housing will also increase. However with the recent economic conditions this increase in demand has not been satisfied with an increased supply of housing, resulting in a shortage of housing stock. Falling vacancy rates and higher rents have made it more difficult and expensive to find rental accommodation.

Like all good investments you first need to consider the property to be purchased. As with all property investments, location is the key consideration. Generally properties located within 20kms of the CBD with good train, bus and freeway access will offer stronger returns.

Once you have researched your investment property, you will then need to decide on the gearing strategy that best suits you. This will be determined by your financial circumstances, retirement strategy, the level of your deposit, equity available, surplus monthly cash flow (income less Expenses) and your acceptable level of risk. These considerations will clarify whether negative gearing or positive gearing strategies are most appropriate to your situation.

SHOULD YOU HAVE POSITIVELY OR NEGATIVELY GEARED PROPERTY INVESTMENTS?

Here’s a brief description of both gearing strategies to help you identify with the possibilities of each.

Positively geared properties are when the rental return is higher than your loan repayments and outgoings. Positive cash flow properties are self-funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth.

Bear in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions).

Positive gearing is beneficial when an individual does not have surplus cash flow to fund income losses during the ownership period or other income to offset losses. Negatively geared properties are when the rental return is less than your loan repayments and outgoings (placing you in an income loss position). There is however the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property. In this circumstance the rental return is not considered as important in the decision process.

The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable. The result is that the cost of owning the property is being funded by your tenant (in the form of rent), the tax office (in the form of tax savings) and your surplus cash flow.

Ultimately most investors will aim to be positively geared in the long run. Generally high tax payers choose the negatively geared investment option to maximise their tax returns and benefit from the long term capital growth potential. Investor’s closer to retirement or in a lower income bracket may choose positively geared investments to maximise their income potential.

Feel free to call the office or ask your accountant to calculate the various loan to income ratios that may help you decide which gearing option is best suited to your individual circumstances. As always it is best to seek professional advice before proceeding with any investment strategy.

green dollar sign in front of commercial buildings
green dollar sign in front of commercial buildings