Property has been considered a popular path to wealth for Australians for many years. It has the potential to generate capital growth (an increase in the value of your asset) as well as rental income. There are also tax advantages associated with negative gearing. However, when buying an investment property, it is wise to remember that you are making a business decision and it’s worth taking the time to plan.
We have collated 10 steps to guide you in through property investment
(1) Do your homework
Think with your head – not your heart. It is important to asses your current financial position. What are your cash reserves and what equity do you have in your present home? Look at your long term objectives and factor in potential changes to your current situation. For example; the birth of a child or the loss of one income.
(2) Understand negative vs positive gearing
Positively geared property – rental income is higher than your loan repayments and outgoings. Tax is likely to be payable on the net income.
Negatively geared property – rental income is less than your loan repayment and outgoings. The loss can be offset against other income earned, reducing your assessable income and therefore your tax payable.
(3) Decide how to fund it
It is most likely going to be in the form of an investment loan. The deposit can come from savings, or from equity in your owner occupied or other investment property. It is also becoming popular to invest in property via a self managed superannuation fund (SMSF). SMSF lending is highly regulated and more complex than an investment loan. It is important to seek advice from a financial advisor and/or an accountant prior to making any decisions.
(4) Choose the right loan
Interest only loans are popular for investors because your borrowing costs are completely tax deductible. There are many other options however so talk to us about your requirements and we will make some recommendations.
(5) Find out how much you can borrow
This is an essential step to be realistic in your expectations and focus your house hunting time on properties you can afford.
(6) Calculate your up-front costs
Always remember to factor in costs such as stamp duty, application fees and legal costs into your plans. A building and pest inspection are also a must to avoid expensive headaches down the track.
(7) Estimate ongoing costs
All properties incur ongoing expenses (e.g. rates, insurance etc). You’ll use your rental income to cover most or all of these but you might need to have some spare cash set aside until you start receiving rent (most agents pay the owner at the end of each month so you won’t receive rental income straight away).
(8) Finding the right property
This is obviously the area in which you will spend the most time. It doesn’t have to be a home you would live in. Think about which features are universally appealing and of course remember the old adage – location, location, location!
(9) Find a good property manager
Personal recommendations from tenants and other landlords are always a good place to start.
(10) Cover yourself with suitable insurance
Some insurance companies now combine building cover with specialist landlord insurance. You should also consider life and income protection insurance to ensure your family doesn’t suffer financial hardship repaying loans if the main income earner is unable to work.
Contact us today to start your journey, or if you have preliminary questions. We’re here to help!