Want to invest your money so you can generate more income? Investment property is the way to go. It has a lot of advantages, but there are also a set of risks and challenges. So in this blog, we will help you get your head start about investment property and what are the things that you should know and prepare.
What is Investment Property Purchase?
Investment property is the act of buying a property with a goal of generating income. You can do this by renting the property you bought or even selling it to make money.
Here are some of the reasons why investing in property is popular with Australians:
- To generate passive income. Having a passive income is one of the most popular reason why many Aussies are investing in a property. When you own an property it can be your asset that generates rental income.
- To hedge against inflation. Remember that property prices are not stable, as years go by, it tends to go up since the cost of living also increases. If you own a property, you can protect yourself with rising prices as well as maintain your purchasing power over time.
- To make a long-term investment. Unlike any other kind of investments, real estate is much more stable since you can get streamlined income. So this is an ideal choice if your are looking to make a long term investment.
What Are The Tax Benefits of Investment Property?
There are also some risks involve when you start your investment property journey, but on the other hand, there are also some tax benefits that you can’t experiences with other investments.
- Negative Gearing. One of the tax benefits that you will get is that you may be able to claim the money you lose in your investment property from the taxes that you have already paid through your employment or other investments.
- Withdrawals from an equity loan are tax-free. This means that if the value of the property you bought increases and you don’t want to sell it, you can acquire a loan from the bank to access a portion of the increase. In short, when you withdraw from your equity loan, you won’t need to pay any taxes.
- Depreciation. Depreciation refers to the decline of your property and its assets. When it happens, you can claim the lower value and significantly reduce your taxable income.
The Cashflow Management
Cashflow if of the most important thing that you have to consider when it comes to investment property purchase. But what is cashflow? Cashflow is the difference between the rental income you receive and the expenses that are associated with owning as well as maintaining the property.
Ideally, you want your investment property to generate enough positive cashflow so that it covers all of your expenses and leaves you with a little extra to pocket each month. Positive cashflow is what allows you to build wealth through real estate investing, while negative cashflow is where your expenses and financing costs exceed the income and you lose money each month.
There are different factors that impacts the cashflow of an investment property, such as the location, type property, and rental rates. So if you want to be an investor, it’s very important that you do your homework and calculate the estimated cashflow of a property before making it an offer. Here’s how you can calculate cash flow:
- Determine the gross income from the property.
- Deduct all property expenses from the gross income.
- Subtract debt service relating to the property.
- Use the difference for your cashflow.
The gross income of the property is that total income from any sources before any mortgage payments or expenses made. Each property will have a different type of expenses, so it’s very important to determine every expenses you have made because it will give you idea of the cashflow property. To give you a background, here are some of the expenses that you should take note:
- Property maintenance
- Property management
- Property taxes
- Property insurance
- Utility Expense
- Business Licenses
What Are The Associated Costs?
When it comes to investment property, you need to be aware of all the associated costs to help you know your financial capabilities. We compiled a list of all the associated costs you may encounter.
Associated Costs When Buying An Investment Property:
- Mortgage registration fee. This kind of fee depends on the state you lived in, it will be charged when you register for a home loan. It is also usually paid to the applicable state or territory Land Registry on behalf of you by your lender.
- Home loans fees. Some lenders will charge a fee for you to apply for a loan, so try to avoid this fee. Contact your mortgage broker and ask them about these fees.
- Lender’s mortgage insurance. If your house loan is worth more than 80% of the purchase price, your lender will normally ask you to pay the lender’s mortgage insurance (LMI). Lenders are protected by this insurance if you skip on your payments and the amount you will pay will depend on your loan, type of property, and lender. There are also some home loan options that offers zero LMI, ask your mortgage broker about those options.
- Conveyancing/legal. You will be responsible for paying the costs of conveyancing since he will be the one to prepare the important documents.
- Buyer’s agent. They are the ones who help you through your process of finding and acquiring a property.
- Stamp duty by the state. This is a tax charged by the state and territory stamp duty on your home value.
Associated Cost When Owning An Investment Property:
- Maintenance and repairs. As a landlord, you will responsible for the maintenance and repairs of the property.
- Property Management. This is applicable if you want an agent to act on your behalf to find a tenant, they will receive their commission once they sign a new tenant for your property.
- Strata/body corporates fees. This applies if you own a property in the form of shared land or title. (i.e. apartment or townhouse)
- Insurance. Your property is your valuable asset, so it’s important for you to apply for insurance before you settle.
- Utilities. The fees for utilities depend on your agreement, you may be the one to pay for the utilities or your tenant.
- Council rates. The landlord or property owner is the one who pays the council rates.
The Current APRA Lending Restrictions
The Australian Prudential Regulation Authority or APRA is the one who increases the minimum interest rate buffer that banks are expected to apply when evaluating the serviceability of home loan applications. APRA has informed lenders that it expects them to assess new borrowers’ ability to meet their loan repayments at an interest rate 3.0 percentage points higher than the loan product rate since with the increase, new borrowers will be affected. (source: APRA)
Conclusion:
If you want to finally start your investment property journey, you have to make sure that you choose the right type of property that suits your needs as well as objectives. Moreover, you should also understand that there are set of risks that’s involved before you commit to anything.
Remember, every investments always comes with a risk, but through careful considerations of the important points mentioned in this guide, you will be on your way to success in investment property.
