Buying property tends to be viewed as a safe and a relatively easy option for long term investment, making it is a popular choice in Australia. It is a tangible object, and this in itself appeals to a lot of people. It is very important to seek professional advice and do your research if you are considering property investment, so that you can get maximum clarity about making such an investment.
Firstly, let’s look at some of the Advantages and Disadvantages of Property Investment
- Capital Growth
- Relatively safe
- Can be covered against most risk i.e. Insurance against fire, theft and damage
- Provides an income
- Tax Benefits
- Less volatile than other Asset Classes
- Bad tenants or periods without tenants
- Costs (Hidden and Ongoing) stamp-duty, legal and conveyancing fees, maintenance and repairs, insurance, rates, utilities
- Interest rate rises
- Liquidity, the process of sale takes longer than other investments.
Property Investment can provide solid financial returns if done carefully. There are however many costs involved both upfront and ongoing. These costs need to be carefully considered when making the decision to go ahead. Below is a list of some of the potential costs involved.
- Deposit – 10% of the asking price
- Loan Establishment fees – some financial institutions will charge a set up fee for the loan
- Mortgage Insurance – may be required if your deposit is less than 20%
- Stamp Duty – this will differ from state to state and usually a higher rate for an investment property vs owner occupied dwelling.
- Legal fees
- Conveyancing expenses
- Search costs
- Pest and building reports
- Connection of utilities
- Insurance (Building and Landlord)
- Mortgage fees
- Land tax
- Council Rates or Strata/Body Corporate fees
- Mortgage Repayments
How to Choose the Right Investment Property
There are a few questions you should ask yourself to help you determine which property is right for you.
Why are You Buying?
It is really important to work out your investment strategy before making a purchase.
- Are you looking to make a quick profit or hold onto the property for the long term?
- Is the investment to create an income for the present or future?
- Are you looking to cash in to help fund your retirement?
Where are You Buying?
- Proximity to amenities such as schools, public transport and shops increases desirability as well as value
- An area that has strong potential for above average growth. This may be due to redevelopments, population growth (this leads to infrastructure growth), changing demographics
- An area where rents are high compared to property value is preferable, if you are looking for income over capital growth
- Distance from a major city is always appealing to both buyers and tenants
- Vacancy rates can be very telling about how desirable a neighbourhood is. Often, higher vacancy rates are an indicator that an area is less desirable.
- An area you are familiar with can make it easier and quicker to research.
What Type of Property are you Buying?
- Typically, a house will have higher capital growth and an apartment or unit will have a higher rental yield. This goes back to the question Why are you Buying?
- Find out the demographic of the area in which you are looking to buy, if it is full of retirees a house with a lot of stairs will rule out a big part of the tenant market.
- Look for a property that will appeal to a diverse group of people across the rental market such as singles, families, couples and even retirees.
- Find a low maintenance property that will allow you to avoid taking on extra costs. Homes that are older and some other homes that have pools or require extensive landscaping may incur maintenance costs.
Will I Get the Return I am After?
- Don’t base your decision on emotions.
- Do the math.
- Work out the rental yield (measurement of future income).
- Research where the market is in the property cycle.
- Work out the capital growth potential.
All these questions can be better answered with the help of a professional, again please seek advice from a financial adviser before risking your hard earned money. You can browse financial advisers on Adviser Ratings here.
The Property Cycle
It is worth familiarising yourself with property cycles if you are looking to invest in the property market, if only to avoid buying in at the most expensive time. Potential investors can be attracted to property during strong growth periods, which is why researching where the market is in the property cycle is important. Property cycles refer to the recurring movement in property market prices. These parts of the cycle or phases can be described as;
- Property prices are stable, and an attractive time for buyers (Opportunity Phase)
- Growing interest and confidence in the market pushes prices up (Growth Phase)
- Affordability will lead to prices reaching a price peak. The highest point of the cycle (Peak Phase)
- Banks may tighten due to buyers overextending, restricting buying in the market. There may be an oversupply of properties by developers. Lower demand, slows or decreases property prices. It may just be a long period where prices may not necessarily fall but stagnate (Correction Phase)
The phases have different names depending on who you are speaking to such as Stabilisaton Phase, Upturn Phase, Boom Phase, Slump Phase but are usually all referring to the same differing stages in the cycle.
Property cycles tend to be localised, not all areas are in the same stage at the same time. It is also hard to place timeframes on property cycles. This is because there are a number of factors that influence the cycle and property prices in general outside of time passed.
These may include;
- Interest rates – rate cuts can drive upswings in the market as rate increases can kickstart downturns
- An oversupply of properties in a particular area
- Willingness of banks/lenders to write new loans
- Unemployment/Job Security and the overall Economy
- Local unemployment (closure of major source of employment for a particular area)
- Population Growth
- Rental vacancy rates
- Changes to zoning restrictions
- Changes to local infrastructure (urbanisation of suburbs)
- Changes to Capital Gains Tax
- Overseas Buyers
The decision of when is the right time to buy or sell is really up to you. Aside from a range of financial, legal, personal and emotional factors influencing your decision making process, if the right property comes along at a time you can afford it, that’s the right time to buy!!
Investment Properties and Taxation
There are several taxes incurred by a property investor when buying, owning and selling a property. It is important to get advice from a professional regarding the personal tax implications when undertaking any of this. It is also essentially that you keep records from the start so that you declare all income and can claim as many deductions as you are eligible for. These taxes include;
- Income Tax – all rental related income needs to be declared on your tax return. Things like, rental bond, insurance payouts, government rebates. If you are making a profit from renting your property, you may be required to make PAYG instalments.
- Capital Gains Tax (CGT) – tax on the profit made from the sale of the investment property.
- Property Taxes or council rates. These differ in amount and frequency from local council to council.
- Land Tax – based on the unimproved value of land owned. It does not include dwellings and is payable on all property owned other than principal place of residence.
- Stamp Duty – tax paid on any property purchase (some savings/discounts available for First Home Buyers).
Possible deductions for a property investor
This means offsetting your expenses against your rental income and reducing the amount of tax payable.
- Maintenance Costs – eg. cleaning, repairs and maintenance
- Management Costs – eg. insurance, property manager fees, advertising for tenants
- Borrowing & Acquisition Expenses – eg. surveyor fees, legal expenses, borrowing expenses
- Depreciation on fixtures and fittings in the property
- Negative Gearing, a reduction in tax liability when the cost of the investment exceeds income it produces. This means you may be able to claim the full amount of rental expenses against your gross income.
For more information on the income you must declare and the expenses you can claim regarding a residential rental property see Australian Taxation Office (ATO) website here.
Managing an Investment Property
The options for property management are to do it yourself or to take on an agent who can handle the managerial tasks for you.
Self-management of your property means you do not have to pay an agent, which can be a significant and attractive saving. However, it is a big undertaking and apart from a list of responsibilities, you will also have to keep yourself up to date with the relevant legislation and regulations.
Some things to consider when making the decision to self-manage are:
- Rent collection – setting up and maintaining a clear process so that it is received in full and on time
- Finding a tenant/s - advertising, enquiries, tenant screening, viewings, application and acceptance process. Including first inspection before handing over keys, collecting bond and placing it with appropriate bond authorities.
- Inspections (State legislation regarding frequency, notification and entry process must be adhered to).
- Repairs and Maintenance (It is important to understand tenants’ rights in regard to this. Hot water and plumbing are but two urgent items. Contacts for tradespeople is a must to ensure you can have work done both quickly and cost effectively).
- Rent rises (in line with lease agreement and legislation, you will need to research market rent for you property)
- Record keeping
- A short course to get up to speed with Acts and legislation (you will be looking after things like lease agreements and bond lodgement forms)
- Time – availability for the work involved in managing the property and communications with tenants
- Emotional distance – this is something not always considered but really important. Evicting tenants and making rent demands is made even harder if you are emotionally involved.
Considering all of the above it is really important you do the math before deciding to become a DIY Landlord. Although it does cost to have someone manage your property for you, some of this cost can be made back with things like, reduced vacancy of your property, additional rent, better deals on repairs and of course your time.
You may choose to use an agent to find tenants and handle the bond details, then take over the management yourself. You will pay the agent a letting fee.
If you choose to use a Property Manager, do your research. An inexperienced manager may not meet your expectations and cause unnecessary cost. Check the manager to property ratio. You want your property to be a priority and if the property manager has more than he can handle you may pay for it.
As an owner, you need to make sure your property is covered for any damage that may come to the building. If your property is a unit or townhouse and comes under a strata title this will be covered by your strata levies.
Take into consideration the option of landlord insurance. In the case that a tenant vacates the premises without having paid rent or leaves the property damaged, you will be covered. The expenses you incur from landlord insurance are tax deductible.
If your salary is part of how you attend to costs and repayments concerning the property, it is important to get enough income protection insurance.
Property investment, whilst seen as less risky than other types of investments, as described there are a vast number of things to be considered before taking the plunge. Do your research, get advice and ‘happy hunting’!!