Buying an investment property continues to be a popular wealth accumulation strategy for Australians. The goal behind it should be wealth accumulation over time to secure a nest egg for the future, not a strategy to make a quick profit and an instant road to riches. How effectively you choose and then manage your investment will determine its success. At the end of the day, the cost of owning an investment property can be relatively small once you consider your rental income and the allowable tax deductions you could achieve.
Here are 8 tips for smart property investment…
1. Choose the right property in the right location at the right price
While capital growth is a long-term aspiration, the amount of capital growth you can hope to achieve will depend on the initial choice you make. Choose a property that is more likely to increase in value, so buying at the right price is absolutely critical. It’s not like buying shares where the value is transparent. Real estate is more difficult to price. The key is to do your research and work with an agent who knows the area well. Over time, you’ll get to know a bargain when you see it.
Choosing the right location, one that offers excellent amenities within easy access will be critical to ensuring a steady rental income stream. It is also important that your property suits the demographics of renters in the area. For example, if it is near a university, more bedrooms will be in greater demand than a big backyard. A family home that is close to schools and parks on a quiet street will be more desirable than a property on a busy road, etc. The key is to put yourself in the shoes of the prospective tenant in selecting the right property.
2. Do the math
Investing in property is a proven path to long-term wealth, with the emphasis on long-term. So it is critical to ensure that you will be able to maintain your mortgage repayments, taking into account potential life changes along the way. Factor in some unexpected expenses along the way as well because, as an investor, you will be responsible for repairs and maintenance.
Ensure you also factor the taxes involved in property investing into your calculations. Advice from your accountant is vital in this regard as these can change over time. Stamp Duty, Capital Gains Tax and Land Tax all need to be taken into account.
Be aware also that lenders only take 80% of the rental income into account when working out whether you can afford an investment loan.
3. Find a good property manager and let them to do their job
A good property manager is worth their weight in gold. They will market the property to attract the right tenants, price the rent in line with the current market, narrow your choice of tenant to the best candidates following a thorough review and selection process, manage your property and tenants and help keep good tenants paying on time. A professional property manager will also advise you of legislative changes you need to be aware of and advise on when to increase the rent. The good news is that the management fees are tax deductible.
4. Pick the right type of mortgage to suit your circumstances
There are many options when it comes to financing your investment property, so get sound advice in this area as it can make a huge difference to your financial wellbeing.
Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a financial advisor. Keep your investment loan separate from your home loan so you can maximise your ongoing taxation benefits and reduce your accounting costs.
Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide.
5. Leverage your equity
Leveraging equity in your home, or equity from another investment property, can be an effective way to buy an investment property (or another one). Equity is calculated by working out the difference between what your property is worth and what you owe on the 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 that you could potentially access to purchase another property. Furthermore, using the equity in your existing home can allow you to borrow more money against your investment property, which can increase your tax deductions.
6. Negative gearing
Negative gearing can offer property investors certain tax benefits if the cost of the investment exceeds the income it produces. Australian law allows people to deduct their borrowing and maintenance costs for a property from their total income. However, bear in mind that you can only get a tax benefit if you earn other taxable income. So, although you are making a loss on the property, the loss can be used to reduce the amount of tax you need to pay on your other earnings. That being said, it is not recommended to buy an investment property just to get a tax deduction.
7. Consider the condition and age of the property
Even if you think you’ve got yourself a bargain by purchasing a renovator’s delight at a great price, having to make major repairs early could make a significant difference to your profits and damage your cashflow.
It is advisable to engage a professional building inspector before you purchase to conduct a thorough inspection of the property to find any potential problems so you know what you’re up for and if it’s worth buying. It is also wise to always use qualified, licensed and insured tradespeople to carry out any required work as many investors have paid the price when trying to cut corners.
8. Make the property attractive to renters
The best rental properties attract the best tenants. So the more attractive, comfortable and appealing you make your investment property and the better it is managed, the more likely you will be to attract a quality tenant and keep them for longer, thereby minimising vacancy periods and keeping your cash flow rolling. Furthermore, good tenants who feel looked after will care for your property like it’s their own, which is important for capital growth over time.
Remember, property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better, and as you build up equity in that property, you may be able to consider purchasing a second investment property by tapping into that equity. However, unlike shares or managed funds, you can’t sell part of your investment property if you need access to money, so always take that into consideration.
Last but not least, strong demand and a rental property shortage are crucial factors favouring investing in property right now.