Property is becoming a more and more lucrative and appealing option for the savvy investor. Most people buy an established property for investment purposes, but if you do your homework you might be able to create immediate value by deciding to build.
The cost of holding your investment property can be surprisingly low when you take into consideration your rental income and the tax deductions that you will be entitled to as an investor.
While an investment property can offer increasing wealth and help to secure your financial dreams, the way that you manage your investment will ultimately determine whether you reach your goals.
Here are out 10 tips on managing your investment property to ensure you achieve the financial future you desire.
1. Choose the right property in the right location.
With so many builders to choose from, it is important to think about the quality of the home that you are purchasing and the way it will provide for potential tenants. Do your research and focus on companies that are established, offer long-term knowledge and expertise, provide quality customer service and craftsmanship and have a recognised name.
When it comes to finding the right location, you can find out demographics on your area through sites such as Domain[AG1] , or gather invaluable information from your lenders or mortgage insurers or builder. Choose a location that offers all the amenities your tenants will need and a home to suit the local demographics and aesthetic environment.
2. Understand the property market and the location you choose.
Speak to locals, real estate agents and property experts in the area you are looking to build your investment property in so that you can gain a full appreciation of the lucrative parts of the suburb.
Look into the developments the local council has planned for the area and any changes taking place.
Accessing independent information, such as from RP Data[AG2] , can also give you insight into the average rental income, property values and demographics of the people and area. Contact us for a free RP Data Report on the locations you are looking at.
3. Do the math – your cash flow is important.
Investing in property is not a quick fix solution; rather it is a medium to long-term investment in your family’s wealth and future. Before jumping into investing, make sure you can afford your mortgage repayments over the long term – you don’t want to be forced into selling your property early due to financial stress.
It can be inexpensive to keep your property once you own it, as rent and tax deductions on many of the expenses will help pay for any costs. Remember, rent increases overtime as does your income, so things will become easier over time.
Here is an example of what the figures might look like for your investment:
Purchase Price of Property: $500,000 Stamp Duty and other costs: $20,000 Amount Borrowed: $520,000 Rental Income Received: $450 per week
Ongoing Costs Interest Cost @ 5.00% p.a.: $26,000 Rates: $1,500 Land Tax: $804.00 (Calculate your land tax in NSW[AG3] ) Agents Fee @ 7%: $1,638 Insurance: $500.
Total Costs: $30,422 Less Rent: $23,400 ($450 per week x 52) Annual Shortfall: $7,022 Less tax deduction: $3,160 (assuming a tax rate of 45%) Annual after Tax cost: $3,862 or the equivalent of $74.26 each week.
In this example, your property is costing you only $75 per week – that is a tank of fuel or a night out for dinner.
Make yourself aware of the taxes, including Stamp Duty, Capital Gains Tax and Land Tax, involved in property investment and add these into your calculations.
Also, take into account the fact that due to letting and vacancy fees, banks only consider 80% of the rental income when working out whether you can afford an investment loan.
If you are looking at investing and would like help working out the cost of holding a property, contact us on
(02) 8848 6000 or email mychoicehomeloans@mcdonaldjones.com.au
4. Find a great property manager and simply let them do what they do best.
Your property manager is generally a licenced real estate agent who will keep things related to your property in order for both you and your tenants e.g. maintenance issues, tenant management, etc. Your property agent will also help you to find the right tenant and conduct regular inspections to ensure your property is being looked after.
A great agent will tell you when you should review rates and will provide ongoing advice on law, your rights and responsibilities as a landlord.
The actual cost for your property manager is generally deducted as a percentage from the rent paid and is tax deductible.
5. Choose the right mortgage for your unique needs.
With so many options available to finance your investment, it’s important to get expert advice on choosing the right loan for your circumstances. While interest on an investment property loan is generally tax deductable, knowing the borrowing costs that aren’t could make the difference to your finances. Understanding and structuring your loan around your needs is critical.
Consider both a fixed rate loan or variable rate loan rather than focusing on one only and ensure your choice is the best one for your needs. While variable rates have proven to be cheaper overtime, choosing a fixed rate loan at the right time can be beneficial. Remember, rates generally rise in line with property price increases, so higher interest rates may not be a bad thing for property investors.
Rather than Principal and Interest (with a reduced negative gearing benefit as you pay down your loan), most investment loans are set up as Interest only, therefore increasing the tax effectiveness of your investment (particularly if you have a home loan). Another great option for investors is to consider a loan that gives you the opportunity to pay interest in advance or is setup as an Offset Account.
6. Take advantage of your other properties by using their equity.
An effective way to finance your investment is by leveraging equity in your home or from another property investment. Using your equity can help you to borrow more money from your lender for your investment and therefore increase your tax deductions.
Equity is the amount of money you have paid and own in your home and can be calculated simply by working out what your property is worth and the difference between that figure and the amount you owe on your mortgage.For example, if your home is currently worth $750,000, and you have $250,000 remaining to pay off on the mortgage, you have $500,000 worth of equity.
7. Get to know negative gearing.
Australian law allows investors to deduct borrowing and maintenance costs for your property from your total income should you earn other taxable income and if the cost of your investments exceed the income it produces. While you may be making a loss on your property, the advantage is that you can reduce the amount of tax on your other earnings as a result.
8. How does your property fair?
What is the condition of your property? Does it need maintenance work? Any work you do during the first few months can affect your profit and really damage your cash flow. That is why building new is so great for investing; it removes the hassle of maintenance for many years and allows you to enjoy a quality investment from day one!
9. Create a home that will easily provide for your tenants.
The presentation of your property is important in attracting great tenants. While it is important to differentiate your own home and your investment, think about whether you yourself would live in the property. Does it meet your expectations and needs?
Choose neutral tones for your finishes to attract a range of tastes and ensure the kitchen and bathroom are in a fantastic condition so that your tenants enjoy the time they spend there.
10. Remember, property is a long-term investment.
Property is not a get rich opportunity. Property prices will not rise instantly and you should be prepared and able to commit to your investment over the long-term. Investing in property is not about being greedy, but rather about finding the right balance between financial stability and still being able to enjoy the lifestyle you love.
If you would like to chat to one of our experts about your individual investment property goals, contact us on
(02) 8848 6000 or email mychoicehomeloans@mcdonaldjones.com.au
Before you sign anything, make sure you know what the costs will be.
