If you’re looking to invest in the Aussie property market, here are some key points to consider at any age. If you’ve been saving for a while and feel you’re ready to purchase your first investment property, it’s worth ensuring you’re across some important points so you can make a well-informed decision.
Property prices can go through major swings that can occur with little warning, so while property values might go up, keep in mind they might also go down, which could see you breakeven or even incur a loss depending on how long you hold on to the property for.
- Have you set a budget within your means?
You may be looking at an investment loan term of 25 or 30 years, depending on the size of the deposit you’ve saved. And, as this may be one of the biggest debts you’ll ever take on, it’s important to prioritise any other financial goals you might have before jumping into anything. If you already own a property, it may also be possible to access the equity you have in it to secure additional finance from your lender. Here’s a snapshot of some of the upfront and ongoing costs you may come across.
- Upfront costs
- Deposit (generally around 10% to 20% of the purchase price) unless you’re paying outright
- Loan application fee (a one-off payment to your lender covering basic admin)
- Lender’s mortgage insurance (which you may need if your deposit is less than 20%)
- Government charges (stamp duty, mortgage registration and transfer fees)
- Legal and conveyancing costs (which will vary depending on the solicitor or conveyancer)
- Building, pest and strata inspection fees.
- Ongoing Costs
- Loan repayments and interest charges
- Strata fees (for communal properties)
- Council rates, Water rates, Insurance (for the building, contents and you as a landlord)
- Repairs and maintenance costs
- Property management fees
- Vacancy costs if you don’t have tenants for a period of time
- Other charges, such as land tax.
- Have you looked at your credit report lately?
If you’ve got a credit card, mobile phone plan or utility account, there’s probably a credit reporting agency out there that has a file with your name on it. Credit providers give information about you to credit reporting agencies and they also access this information to determine whether they want to lend to you. With that in mind, before you start inspecting properties, be sure to check your credit history, as a tarnished credit report could affect your ability to get approval on a loan.
- Have you researched where to buy and what to buy?
What you decide here will impact the money you could make in both the short and long term. When you’re doing your research, things to investigate might include:
- What properties are selling for in the suburbs you’re looking at
- Whether these suburbs have price growth potential
- If there are proposed developments nearby that could affect prices
- Whether you’ll need to renovate and if you have the extra funds to do so
- What average rental returns and vacancy rates are like in these areas
- Whether there are local amenities, such as schools, shops and transport nearby.
- Have you thought about who’ll manage the property?
If you’re time poor or located a long distance from your investment property, another thing you’ll need to think about is appointing a property manager. Note, this this will come at a cost of approximately 7% to 10% of your total rental income each week1. Some of the things a property manager will take care of include:
- Advertising the property
- The screening of potential tenants
- Before and after property condition reports. Routine inspections
- How and when tenants pay the rent
- Maintenance and repair issues
- Responding to complaints/evictions.
- Are you across your legal obligations?
While property managers can help out in a variety of areas, as a landlord you will still need to be aware of your legal obligations. There are various responsibilities that apply to landlords before, during and when ending a tenancy. These can differ depending on which state in Australia the investment property is located.
- Have you investigated potential tax deductions?
When you own an investment property, you can often claim a tax deduction on a variety of expenses related to the property during the time that it’s rented out, or available for rent.
Such items include but aren’t limited to things like:
- Advertising costs
- Property management fees
- Borrowing expenses, including loan interest charges and fees
- Council rates, land tax and strata fees
- Building depreciation and the loss of value over time in fittings and fixtures like ovens, dishwashers, carpets and hot water systems
- Repairs, maintenance, pest control, cleaning and gardening costs
- Building and landlord insurance
- Phone costs and stationery
- Accounting and bookkeeping fees.
Note, travel undertaken to inspect the property is generally no longer a claimable expense in Australia.
- Are you across other tax implications?
How negative gearing can reduce what you pay in income tax
If your property is negatively geared (which means the interest and other costs you incur are more than the income your investment property produces), the loss can reduce the amount of tax you pay on your earnings (i.e. your salary) at tax time.
To give you an example, say you earn a salary of $70,000 and a rental income of $20,000 over a 12-month period. If your net rental property expenses are $35,000, your rental property loss will equal $15,000 for the year, which means you’ll only pay tax on $55,000 of your salary.
If your property is positively geared on the other hand (meaning the rent you’re generating is more than the cost of owning the property) you’ll have to pay tax on the net income the property generates.
When capital gains tax is payable
If you sell your investment property down the track and make a profit, capital gains tax may be payable. The good news is, the price you paid for the property (including buying and selling costs, like stamp duty, legal fees and the real estate agent’s commission) will reduce the amount considered as ‘profit’. In addition, if you’ve owned the property for at least 12 months, 50% (rather than 100%) of the profit you make will be subject to capital gains tax.
You’ll also need to keep records of the date and costs of buying the property for capital-gains-tax purposes, and anything regarding significant changes that may take place, such as repairs, improvements or should you decide to subdivide and sell part or all of the property down the track. Remember that keeping these records will help make sure you don’t pay more tax than you need to.
How can we help?
If you have any questions or would like further information or you are seeking property tax advice, please feel free to contact our office via email –info@investplusaccounting.com.au or phone 02 9299 7000 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail. You can arrange a free 15 minute no obligation chat to discuss your options. Please arrange an appointment with our office by clicking here
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The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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