10 Questions about Investing in Property
1. What is Residential Investment Property ?
A residential property is a house, townhouse, terrace or unit which the owner does not use as a personal residence, but rents it out. This allows the investor to benefit from both tax advantages and rental income and capital growth from the property.
2. What is Negative Gearing ?
The term Negative Gearing simply refers to a situation where your tax deductions exceed your taxable income from the investment itself. For example, a residential investment property is said to be negatively geared if the mortgage payment, depreciation and costs on your property exceed the rental income. In other words, over and above the investment income, you claim interest on your mortgage, depreciation and costs as a complete tax deduction.
3. What if I don’t feel comfortable about going into debt ?
While the concept of debt may seem disturbing, the reality is we live with debt in one form or another, and few people attain true financial independence without some form of leveraging. In fact, most Australians are actually more comfortable with debt than they realise, through the mortgage on their own home, or perhaps the loan on their motor vehicle or furniture. Many of us are “in debt” to the tax man by virtue of the fact that we earn an income. There are two key principles that will ensue security when it comes to borrowings :
- Only borrow to purchase appreciating assets
- Make sure your debt is manageable
4. What if I lose my job ?
Should you lose your income, you will also your ability to pay tax and make your own small contribution. For most people there is some form of compensation or payout for lost employment, allowing time to find another source of income. Alternatively, you may wish to consider some from of Income Protection Insurance, which can replace up tp 75% of your regular income while you are unable to work and in some cases is tax deductable. Remember the only amount needed to maintain and investment for 12 months without an income is your contribution, not the total loan amount.
5. Why am I using collateral security instead of a cash deposit ?
Your property will not increase in value any faster by puttng your own cash into it. Because it is a tax eﬀective investment, you should borrow the full amount (in most cases) for the property, plus any associated costs, to maximise the tax returns that you generate. This also allows you to use your cash for other purposes or investments. Some people only use their own property for shelter, you are using yours to provide a basis for building a property porƞolio and future wealth.
6. What happens if interest rates rise ?
Being in a long term investment strategy, one would expect the interest rates of the associated loans to change. If this is a concern you can choose to fix the rate of your home loan for as many years as you like. As interest is completely tax deductable, any increase in interest rates will also increase your tax returns.
(You may notice a period of low interest rates is usually followed by and increase in property prices).
7. What happens if I can’t find a tenant for my property ?
Short term vacancy is a normal part of property investment. To cater for vacancies between tenants your budget includes a vacancy factor of at least 20%, meaning you are assuming 41 weeks worth of rental income each year. Long term vacancy is generally created in one of two situations and is avoidable. The property becomes uninhabitable due to damage or tenants departing without notice. In this case your land lord protection insurance will meet the rent whilst the property is being repaired or the next suitable tenant is being sourced (subject to the terms and conditions of your particular policy). You are trying to achieve a rent in excess of what the market will bear. Your property manager will ensure the property is positioned correctly in the market to maintain the maximum occupancy.
8. What if the Government changes the rules ?
Any change to the rules is generally to ensure that people are not abusing the system and are working with the guidelines provided. Changes in law and tax are not generally made retrospective. Governments are interested in stimulating the economy, not just collecting revenue. Property investment provides many areas of benefit for the economy, such as: The Creation of jobs through the development, construction and sale of property. The creation of taxes such as stamp duty and income paid tax by all relevant industries such as builders, electricians, plumbers, etc. Providing housing which Governments do not need to fund or maintain. Positioning you for retirement without having to rely on the welfare system.
9. What if I don’t have time to manage my investment ?
The use of an eﬀective Property Manager will save you time, money and tenancy headaches. They will take care of some or all of the following duties associated with managing an investment property. These include Maintenance & Repairs, Screening of tenants, Rent Collection, Lease preparation, Advertising, Regular inspections of your investment property.
10. Why hasn’t my accountant told me everything about investment property ?
Generally, accountants are not pro‐active and we probably expect too much from them. Can you remember the last time your accountant contacted you with an idea or a suggestion? Accountants are specialists in their field, but generally they are not specialists in property investment. Some, however, do specialise and have rental properties of their own.