Real Estate Investing
Investment property is a tried and proven way to create wealth
Some of the wealthiest people in Australia have gained their wealth by wise investments in real estate properties. But there are also those who have not chosen wisely, and have gone the wrong direction. Professional advice is vitally importtant. We can assist you in utilising research and experience in selecting an appropriate property.
Wise property selection, not speculation
Building a property portfolio isn't meant to be a gamble. There are characteristics of a good investment property that can be identified, giving a high degree of assurance of growth. You have heard that location is the key, and it certainly is one of the more important aspects. But identifying the aspects of a good location isn't as simple as it might seem. And then there are a number of other characteristics that are also extremely important.
The benefits of gearing
One reason that property is so popular, is that individuals and lenders are comfortable using them as security for loans. However, borrowing money for a purchase naturally increases the risk involved. It multiplies both positive and negative returns. All the more important then to make sure you have done all you can to select a property that is going to achieve the right results.
Investment property cash flow management
A common strategy is to purchase an investment property, watch it grow, and then utilise the equity for the down payment on the next property. That works, but it is only part of the equation. You also need to be able to service the loan. Negative gearing may be effective in reducing your tax burden, but it is going to drain your cash flow, and that is also going to limit your borrowing power. We can help you to work out a strategy to maximise what you can achieve.
Real Estate Investment FAQs
What is depreciation and building allowance?
Things that are built wear out. Eventually they need to be replaced. That's true of houses and buildings, and it's especially true of plant and equipment.
With those sorts of expenses, the tax department has decided to allow you as a property owner, the permission to deduct a year's worth of that expense at a time, even in a year when nothing is spent.
So, let's consider a house. The ATO has decided that its expected life is 40 years. After that length of time it's likely to either be bulldozed, or so substantially renovated, that it's equivalent to a new home. So, 2.5% of the build cost per year adds up to 100% over a forty year span. That's building allowance.
Depreciation is similar, but it's for the little bits and pieces that wear out sooner: air conditioners, carpet, hot water heaters, light fittings, etc. Different types of things last longer than others, so the ATO has a schedule where you can look up the life of the item. You then can consider a fixed amount of the purchase price alloted to each year as a depreciation expense, or a percentage of the previous year's written down value. Even though you may not replace any of those things in a given year, there is a depreciation expense that you can apply. That reduces the taxable income, and hence saves you tax dollars.
Of course, eventually those things do really wear out, and you have to replace them. You don't get to use the purchase price as an expense, but you can add it in as something to be depreciated in the years going forward.
What is "buying off the plan"?
When a developer is preparing to construct a large development, he has to raise the finances to make it happen. Some might be his own money, or that of others that he is partnering with in the development. But most of what is needed is going to come from a bank or other lender. For that lender to be willing to part with their money, they are going to want assurance that the development is going to be successful. That will require two things: 1) demonstrating with a degree of confidence what the cost of the development is going to be, and 2) establishing that the units being developed will be sold quickly.
In order to give the lender assurance of the quick sale of the units, the developer will sell units "off the plan." That is to say, the unit hasn't been built yet, but the developer has approved plans, and the purchaser agrees to buy a particular unit at a specified price, even though it only exists as a plan. The purchaser pays a deposit, which generally is held in trust towards the purchase, and after the unit is built and council approved, settlement takes place with the money held in trust being applied, along with the remainder of funds coming from the purchaser.
Is residential or commercial investment property better?
Residential property is something that most people understand. That makes is suitable for more people - it is important to understand what it is that you are investing in. It's also in high demand. A well selected property will have people lined up at the door to rent it whenever it becomes available.
However, commercial property also has advantages. Rental yield may be double that of a residential property. Furthermore, the tenant often pays the outgoings, like council rates and some maintenance costs. And, many people through their work are also familiar with commercial property.
Perhaps the biggest drawback with commercial property is the potential for it to sit vacant for a long time between tenants, while at the same time loan payments must continue, and there is no longer a tenant to cover the outgoings. Furthermore, the owner may need to make modifications to the property to suit the new tenant, and even provide several months of free rent at the start, often related to the length of the lease.
Is it better to buy a home to live in or an investment property?
There are pros and cons to living in a property that you own. On the positive side:
- If it's your first property purchase, you may qualify for a first homeowners grant or stamp duty concession.
- When you own the property you live in, you can do with it what you want.
- Generally, the property that you live in is exempt from capital gains tax and land tax.
- You know what's happening to the property when you live in it. It's less likely that maintence issues will be hidden.
An investment property, however, also has advantages:
- Loan interest is tax deductible
- There are other tax benefits, such as depreciation and building allowance
- Often a property that is a rental is negatively geared. This is expecially true of highly sought after properties in high growth areas. It may be less expensive to rent in one of those areas than to buy. At the same time, you can own investment properties in areas where you don't particularly want to live, but they are within your budget, and they also have good growth opportunities.
Is loan interest tax deductible?
That's a great question, to answer that you’ll have to head over to GraceFinancial.com.au, our financial planning website, and learn more about tax-deductible investment expenses there.
Is real estate a high risk investment?
Real estate can have widely different amounts of risk. It largely depends on what it is and how it is done.
- Anytime you borrow money to invest, risk is greatly increased. The very nature of any investment is that there is a degree of uncertainty. The nature of a loan agreement is the certainty that the lender requires it to be repaid. Hence there is risk.
- Many people are attracted to "brick and mortar" types of investments, because they are tangible and have inherient value. That tends to reduce risk.
- The location and nature of the area in which the property is located can add to or reduce risk. A mining town may boom for a time and then virtually disappear. At the same time, a well diversified metropolitan area will tend to drive growth.
- Purchasing an investment property is far less risky than lending money to a developer to prepare plans and get a development underway.
- Purchasing an existing property has risks related to maintenance issues and market desirability, while purchasing a new property off the plan has a varienty of other risks.
Investment property advice
Developing an appropriate strategy and selecting the right property is a complex matter. We can assist you with many aspects of this.
*Please note that this tax information is provided by James Massey, authorised representative 398841 of HNW Planning Pty Ltd, AFSL 225216. Any advice is general in nature and may not be appropriate for your specific situation.