Real estate investment is an Australian favourite but it’s not without its pitfalls, particularly for the novice investor.
Here we examine some of the benefits and traps of investing in bricks and mortar.
There is something about being able to see and touch property than makes it a popular investment. The fact it comes with tax advantages, can offer income and capital gains and is perceived to be low risk adds to its attractiveness.
Increasing interest rates and the reduction in the first home buyers’ grant might have slowed new lending and have pulled back some house valuations, but continuing demand for property in key areas is helping keep prices relatively strong.
Record migration levels, a continuing rental property shortage and a generation of baby boomers on the move are a few of the factors underpinning demand for residential property in both city and lifestyle locations, such as the coast.
While higher interest rates mean higher borrowing costs, the fundamentals of buying an investment property remain the same.
Like most investments, property is a long term acquisition and there are risks associated. Values fluctuate and you have to be able to meet the debt repayments. Unlike shares or managed funds, if you need access to capital you can’t just sell part of the investment. Selling the whole property can take time.
Negative Gearing
When the income a property generates is less than the costs, including interest on the loan and other outgoings, the investment is said to be negatively geared.
While you are in effect making a loss, the advantage is the loss can be used to offset your tax on income from other sources, such as salary, a business or other investments.
When property is sold for a profit, the capital gain will be taxable. Where a property is held for more than 12 months, there is a discount on the capital gains tax payable, so the amount due is halved.
Of course, the property can sell at a loss. In this case, the capital loss can be offset against capital gains made on other investments.
While it may be tempting to invest because of the seemingly attractive taxation benefits, tax shouldn’t be the driving factor when buying a property.
Negative gearing can deliver a sizeable tax refund, but the reality is that you have to incur a cash-flow loss (ie where expenses are greater than your rental income) first in order to get that refund.
Tips and Traps
There are several ways for people to get into property, including buying with friends, family or work colleagues.
Because affordability is a concern for many, more and more Australians are taking advantage of pooling their resources with people they know in order to get into the property market.
For a loan to be approved the applicants must be able to meet the repayments – but lenders don’t care if one party earns more or has greater liabilities than the others.
At the end of the loan term, the property may not be owned in equal parts. It is worthwhile to make an initial visit to a solicitor to have a contract drawn up outlining who pays what and how much of the property each applicant will own in the end.
Existing Equity
Existing home owners may be able to use their home equity, or equity from another investment property, to buy additional property for investment.
Anyone considering property investment should do their research. Read property-related articles, use data from reputable property-research companies, search the internet and talk to people who are knowledgeable. Find out about rental yields in each area, what infrastructure is in place and planned and what property-price growth has been experienced and is expected.
Investing the time to fully understand the market could save you thousands.
Being a Landlord
If you plan to rent out your property there are plenty of specialists who can take care of management, including advertising, selecting tenants, collecting rent and ensuring the property is maintained. For this they will charge a fee, which can be claimed as a tax deduction.
If you decide to manage the property yourself, learn about the responsibilities and legal obligations you have as a landlord.
No tags