Buying an investment property can have many benefits, but it depends entirely on your investment goals.
Besides being another source of income, property investments come with benefits that decrease your tax obligations.
In this guide, we will discuss the necessary details about buying an investment property so you can make the most of your real estate opportunities.
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Should You Buy an Investment Property?
According to the Australian Taxation Office statistics, there are 2,207,893 property investors in Australia. Out of this, 27.83% fall under the age bracket of 60 years or more.
Another ATO finding concluded that around 64% of investment property owners in Australia generate an income of $80,000 per year.
Property investment may seem less risky than other types of investment, but it comes with a few risks. On one hand, you can achieve capital growth if the property increases in value but, when your returns are low, it may not be enough to cover loan or mortgage repayments.
Need help with which property is the best investment? Contact a property advisor for more information.
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What to Look for When Buying an Investment Property?
Rental Yield vs Capital Gain – Which Investment Strategy is Ideal?
Capital Appreciation
Capital growth is a long-term approach in property investment that allows you to achieve capital gains when property values increase (based on market dynamics). Down the line, property owners can sell their property or use the equity they have built through the asset to refinance or reinvest.
Rental Income
Rental yield or rental income offers short-term returns, which are recorded through rental income on the investment property. Yield is the measure of how much income a property produces each year (shown as a percentage of that asset’s value), which is known as the rental income. When calculating your rental yield, you consider the impact of ongoing costs, such as property management fees, repairs, mortgage payments, and more.
To calculate the gross rental yield from your property investment, check out this article.
Negative and Positive Gearing - Which Option is Best for You?
Negative Gearing
Negative gearing means your rental income does not cover the cost of your loan repayments and other outgoings. You need to make up the difference from your salary or some other source of income in order to meet your financial obligations.
As a result, you suffer a financial loss whilst financing the upkeep of your property and the repayment of your loans. But there are certain benefits to buying a negatively geared property, such as:
- Deduct the loss from other sources of income, which would result in a lower amount of income that is subject to taxation
- Claim depreciation on the value of improvements made to the property while it is being rented out to a tenant
Positive Gearing
Positive gearing means the income generated by the property is greater than the sum of the interest paid on the loan and other property management expenses. Also known as a cash-flow property, this form of investment offers a range of benefits, like:
- Ensuring a stable and passive cash flow
- Allowing you to recover from financial debt
- Making it easier to secure a business loan
The goal of your property investment plan will play a key role in deciding the kind of property you eventually acquire.
It’s always a good idea to sit down with a financial advisor to discuss your property investment strategy.
Buying New Properties
PROS
- Allow tax write-offs in the form of renovation costs
- Appeal to many occupants, especially premium tenants
- Offer security and protection against structural defects
- Lower maintenance overheads through warranty
- Give you access to better, more modern amenities
CONS
- More expensive compared to older buildings or homes
- Takes longer to achieve capital growth
- Greater market risk
- Limited control over land components
Buying Old Properties
PROS
- Gain access to the value of land
- Preserve the property history
- Achieve higher capital appreciation
- Closer to established infrastructure
CONS
- High maintenance costs
- Lower rental income or return
- Less appealing to tenants
- Lower occupancy frequency
- Lower depreciation rates
Does Location Matter to Property Investors?
Location does matter in property investment, often affecting things like your rental income, occupancy rate, and housing market appeal. Even the worst house in a sought-after area is more likely to generate large capital gains over the best house in an unpopular location.
For this reason, first identify the best growth areas in your city. Look for areas where the population is on the rise. Neighbourhoods that are up and coming with significant changes to local infrastructure are also great choices.
You can also check out property listings in real estate marketplaces. Your research should give insight into market trends and help you determine the type of tenant you would be dealing with whilst earning a rental income.
And while it’s important to understand the area you’re investing in, don’t overlook an incredible opportunity for capital growth by staying too comfortable.
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Rentvesting for Beginners
In the property market, rentvesting is a popular option for first-time buyers. It is an affordable strategy that allows buyers to rent a home in the suburb where they wish to live and buy in a suburb they can afford, often renting this space to tenants.
Rentvesting comes with many tax implications. To understand your tax benefits and deductions, it’s best to consult a financial advisor. You should also weigh out multiple options with a property expert, before buying.
Home or Investment Property through Strata Ownership
The strata model is a type of property ownership that allows buyers to own either an apartment or a townhouse. It offers individual ownership for that part of the building, including shared ownership of common spaces. Strata fees are usually charged quarterly and sometimes on an annual basis and go towards the administration and upkeep of the scheme and any required works.
Access Equity for Reinvesting
Equity is defined as the difference between what you owe on a property and its value in the market. It is standard for equity to grow as you pay back a loan. You can also access equity to buy another property without needing a deposit again.
For example, if you own a property worth $400,000, you can use the equity built in that property to finance a new investment. In a case where you still owe $220,000, your equity will be recorded as $180,000.
Depending on your financial situation, banks will decide the percentage of equity you can receive, lending up to 80% of that amount in ideal cases. Out of $180,000, a total of $144,000, is what you can borrow to fund your next purchase.
To access usable equity, you will need to refinance an existing mortgage to free up more funds. We recommend it’s best to contact a financial advisor before securing a home equity loan for a new property investment.
Tax Considerations When Buying an Investment Property
A general rule of thumb in property investing is that approximately 65% of your loan interest is covered through your rental income. You can also recover about 25% as depletion allowance and uncover other tax benefits. Additionally, most investors, quite often only pay 10% of the balance, but this varies from case to case.
For instance, your income tax on an investment property will depend on several factors, such as the tax depreciation prior to it becoming an income-producing asset. Learn more about tax benefits for property investors.
Depreciation Deductions
For any income-generating asset, like a rental property, you can claim a depreciation deduction against the rental income earned within a financial year.
To calculate how much you can claim, you need to find out the value of the property, like the age of the building or any home improvement job done to it. Since brand new properties depreciate over forty years, they attract several investors.
Talk to a property surveyor and find out the depreciation value of a property you own or are interested in owning. Your surveyor can also create a depreciation schedule to help you claim tax deductions at the right time.
Capital Gains Tax
Capital gains tax is the tax levied on any capital gain resulting from the sale of an asset, in this case, an investment property. Property owners are liable for CGT if the capital gain exceeds your capital loss in any financial year.
You do not pay capital gains tax on your principal place of residence. But if you’re generating income from it, it becomes an investment property and is subject to CGT. You can add capital gain to other sources of income to reduce your taxable income.
Tax Refund
Tax refund can be calculated by subtracting deductible expenses from your total rental income and then multiplying this amount by your current tax rate. Deductible expenses can include costs, such as agent fees, body corporate fees, or repair and maintenance costs.
Confused about tax refunds on an invested property? Talk to a financial advisor or property consultant to get some accurate figures.
Claimable Expenses
The Australian Taxation Office provides a complete list of tax deductions for an investment property. The cost of managing and running an investment property in NSW can be offset against your annual income, ensuring further deductions.
You can claim deductions on property management fees, repair and maintenance expenses, mortgage repayments, legal fees, and costs involved in renovation or landscaping. Here’s a case study explaining how you can improve tax returns through renovation.
For more tax-saving tips, contact a property advisor specializing in investment properties.
Do I Need to Invest in Landlord Insurance?
If you want to protect your rental yield as a source of income, it’s ideal to invest in landlord insurance to protect you against a series of risks. Though policies depend on the insurance provider, landlord insurance is geared toward preserving you against:
- Property damage or vandalism
- Theft or burglary by the tenants
- Rental loss from tenant defaults
- Legal fees for tenant evictions
If you’re looking for a reliable property manager, we have a team of experts who can answer any questions you have regarding rental, commercial, or industrial real estate.
Key Takeaways
- Investing in properties can yield both capital gains and rental income, offering long-term growth and short-term returns.
- Negative gearing might lead to financial loss but offers tax benefits, while positive gearing ensures stable cash flow.
- The choice between investing in new or old properties depends on various factors including potential for appreciation, maintenance costs, and tenant appeal.
- Location significantly impacts investment success, influencing rental income, occupancy rates, and capital gains.
- Strategies such as rentvesting allow investors to live in desired locations while investing in more affordable areas.
- Understanding tax implications, including depreciation deductions and capital gains tax, is crucial for maximizing investment benefits.
- It's important to consider landlord insurance for protecting rental income and investment returns.
Can't Find a Property That Suits Your Investment Strategy?
Real estate investment is a great way to build wealth. Not only does it improve your net worth as an investor but also helps you develop equity in an asset.
Whether you own a new or old property, our stress-free property management services can help you maximize your property returns. We can provide solutions to increase the potential of your investment property.
Our Property Investment Services team can put you in touch with trusted property managers who can provide solutions for higher capital growth.Speak with a specialist for more property investment advice or fill our no-obligation assessment to get more insights on an investment property.
