There are many good reasons to go into property as an investment, including capital growth, rental income, tax benefits and control; it’s tangible, easy to sell, lower volatility than other investments, there’s high demand and last but not least, the government encourages you to invest in property!
We refer to Other People’s Money (OPM), as it is integral to our system. We use the bank’s money (OPM) to purchase property with a focus on capital growth and use that growth to purchase further properties. Hence enjoying compound capital growth, the most powerful force in the universe.
- We don’t sell developments—we do however have access to properties that fit our very strict selection criteria.
- We don’t have financial ownership of the associated professionals you need to purchase your property—we still save you time and money by sourcing experts for you, however these are independent advisors who act solely in your interest.
We make sure all of our recommended properties cover the following basic criteria. We stick it because it has worked for us; so why shouldn’t it work for you?
- Close to Public Transport
- Close to Schools
- Close to Shopping Centres
- Provides quality Lifestyle
- Is in a Job Catchment Area
Do I have to be rich to invest in property?
You don’t have to be rich to start. Many property investors have an annual income of less than $70,000.
People who buy property investments are helping the economy and the community by providing much needed housing. There is a housing shortage in Australia, which will become worse with current immigration rates at record levels. There is also a shortage of rental properties. The Government cannot afford to provide all the housing that is required. Property investors provide an essential service by providing supplementary housing accommodation. The Government encourages property investment by providing tax deductions for investing in property that are not available to buyers of their own home.
The Government also knows that you can make money for your future financial security through property investment in Australia and that relying only on your superannuation can be a risk. With more people independent financially there will be less reliance on Government financial support. Let’s face it, the pension isn’t much.
Investment expenditure exceeds income with the difference being written off against earnings thereby providing a tax benefit.
Investment income exceeds expenditure with a positive cash flow inwards. All of the investment expenditure is still tax deductible.
Depreciation is the decline in value of an asset over a period of time and can be applied to all types of assets including investment property.
I suggest you ask the accountant how many investment properties they hold and if they understand the current ATO rulings on the tax depreciation schedule. We regularly work with a number of independent accountants who we trust. Let us know if you would like a referral to a good accountant.
To claim maximum depreciation on the assets of your investment property, you will need a Tax Depreciation Schedule. Again, talk to your accountant or ask us to introduce you to an independent advisor.
There are two types of rental property costs to depreciate.
- The first concerns depreciation for wear and tear of fixtures and fittings that were included in the property purchase or that you later purchased for your property.
- The second relates to capital works deductions, which are applied to the cost of the construction of the building depreciated at the rate of 2.5 percent per year.
As a general rule, depreciation claims on fixtures and fittings are of most value in the first five years of property ownership, while capital works deductions remain constant for the 40-year period.
A high percentage of owner-occupiers creates a secure investment area.
You need to have at least 70% owner-occupiers in the suburb you pick. Owner-occupiers will recapitalise in their property thus improving the value of yours. Also when interest rates are high, some investors opt to sell because of the holding costs of some investments. This can create high supply and low demand resulting in a potential property price fall. Owners are different. When rates are high and costs are affecting them daily, they just tighten the family budget and reduce holidays, etc. They don’t sell. This keeps prices stable in an area. Be aware that the big property investment companies can flood a potentially good area with investors. Do your homework.
Yes. Preferably you want others in your area paying much more for a property than you did. Let them have the big blocks of land with the big houses. This has a great effect on your land value. This also happens with a high percentage of owners in your location.
Yes. People of median age are the greatest earners in Australia and the greatest spenders, simply because there are more of them. They are the types to contribute more to an area. Sorry to state that students and the majority of pensioners are not high income earners and generally don’t recapitalise in their property. Did you know that statistics indicate that out of 100 people at age 65, less than six are financially secure?
Just under three, that’s what you need as an average in your chosen area. We suggest not choosing areas where there are lots of singles or students or older folk.
If an area is built out then there is little chance of exponential growth. I particularly like to purchase in stage one of a new development because I know further stages are likely to be more expensive.
If the lending institutions say that 30% of an income can go towards a mortgage then 30% of an income can go towards the rent.
Understand the average income in an area and you can determine what rent can be achieved. This is important as it effects how much you contribute to your investment payments.
If the local property prices are at an all-time high then you may have some time to wait for the capital growth you require.
Apart from the cyclic nature of property and therefore geographic location, there are several other factors important to identifying areas where there will be significant capital growth. Understanding population growth and migration patterns for example are key. Other market forces to consider are supply versus demand for housing, the changing demographic profile, economic activity, affordability, property type and more.
Make sure that at least 40% of your capital expenditure is paying for the land content of the purchase. It’s the land that will appreciate.
Identify the vacancy rate of an area and stay below the national average for that type of property. You can find out figures from the Australian Bureau of Statistics, the local council and state websites. If the local agent has 100 rental properties on his rental list and have 10 empty you could guess that the vacancy rate in that area was 10% which is way too high for investment. Call a few.
Choose affordable. Keep within the median price range for brand new (turnkey) property prices for the area. You will always find a cheaper property but that defeats the purpose of a quality investment.
With an investment loan of 110% (interest only) you maximise the tax deductibility of your investment property. This way you keep the overall debt in the right place; against the investment. Even though the deposit is coming from your owner-occupied property, it is being used for investment and therefore tax deductible. Note that not all costs are tax deductible, (i.e. stamp duties).
Whilst you retain title to the property at all times, whether you ever get to own the property outright is irrelevant. What is important is how fast your equity increases over time. Eventually the debt will be insignificant compared to the value of the property. Reducing the principal loan reduces the claimable interest. Then you’ll start paying income tax on the rent at your highest marginal rate.
When your equity increases use that as a deposit to buy another investment property. The only loans you should pay out while you are building wealth, are those that are not tax deductible—such as the loan on your own home, car or credit cards.
If you use a broker tell them you intend to purchase the land before constructing your investment property. Typically, they will help you apply for finance for the land purchase and then apply for construction. This way you are borrowing the interest during the construction phase.
Building or construction loans generally operate as an interest-only facility with a variable interest rate during the construction period. You only pay interest on the part of the home loan that has been drawn down, or paid out. Do it with a broker and borrow all upfront costs. This way you don’t pay anything out of your own pocket until the tenants move in.
You will get more depreciation from new property. Some other reasons we prefer new properties are: the tax benefits, minimal ongoing maintenance, building construction warranty and tenant appeal. The better the property, the better the tenant!
New homes are built in five stages, with payment on each stage due after the builder completes it. Therefore the bank will draw down your loan in five stages. These stages are:
- practical completion
Initially you require a 5% return on your new property investment. We would all love great capital growth and great rental yield but I can suffer a 5% return for greater growth.
This is your Tax Depreciation Schedule. A Quantity Surveyor must always undertake a site inspection. When you have an investment property you need a Depreciation Schedule in order to maximise your investment and pay less tax. When claiming depreciation on the building and fittings, the ATO insists that you have a Depreciation Schedule prepared by a licensed Quantity Surveyor. It is wise to use a Quantity Surveyor that is based in the state where your property is located. Let us know if you would like us to help you find an independent quantity surveyor near you.
All reputable land developers and builders will insert a finance clause in the contract they prepare for you.
A finance clause serves a number of purposes: it takes your land/investment property “off the market’’ and it gives you time to secure formal finance approval. The process will take less time if you have already organised a formal pre-approval and, if for some unforeseen reason the lender declines your application at the last minute, the finance clause allows you to walk away from the contract legitimately and without adverse consequences.
Think about it. You have taken out comprehensive home insurance for your own home because you realise that, as careful and responsible as you may be, accidents resulting in expensive damage can happen around your own home. And fire, storm and burglary can happen to anyone.
Why would you assume it would be different for your rental property? No matter how responsible the tenants might be. Insurance taken out to cover a tenanted residential investment property may be claimed as a tax deduction. Refer to your accountant for further information.
I highly recommend that every landlord take out insurance. Not only to cover the building, it’s a policy specifically designed for landlords.
This will cover not just internal fixtures and fittings but loss of rent, malicious damage and even tax audits.
Yes. The reason being is that you can put up the rent accordingly. Also it can mean the tenant stays longer. Many other investors don’t allow pets so your tenant has limited places to go with their pets.
Yes. If a tenant installs Foxtel, they have to get permission to have it on your land. Sometimes there is a contract or additional costs involved. This commitment indicates the tenant isn’t moving for a while and you can increase the rent.
I prefer property managers who specialise in property management and do not also sell property. We can recommend some great property managers in your state who work independently with us to achieve a great outcome for your investment. Contact us for information.
The property has to have access to all the facilities that a family requires. Your tenant may not have the same interests as you so always try to look at the property from their point of view.
- Mortgage Application Fee
- Stamp Duty
- Registration Fees
- Loan Mortgage Insurance
Use one of our handy calculators to work out the costs for your investment property or download the worksheet on page 17 of our “Sit on it” property guide.
The initial deposit can vary but is usually around 20% of the purchase value.
This is a fee charged by lending institutions to cover the costs involved in processing a mortgage application. Some brokers are even asking for an additional fee to process your mortgage. These fees are always negotiable and you will find that just about all lenders will remove them upon request.
This is the most expensive part and is based on the cost of the property you are purchasing. The rate varies from state to state and is paid to the State Revenue Office. You will pay less if you are building a property as opposed to buying a completed property, because you only pay stamp duty on the land purchase not the building component.
Once again, these are a state based fee and vary from state to state. They are payable to the Land Titles Office when you register documents that relate to the purchase of a property.
This is payable if you are borrowing more than 80% or using a non-conforming loan.
Conveyancing costs will differ depending on whether you use a solicitor or a conveyancer. A solicitor will cost more, sometimes up to and over $2000 all up, including disbursements.
If you choose a Solicitor you will have better protection in most instances if something goes wrong as they have the backing of the better qualifications and insurances. A conveyancer will generally be cheaper, and most of the time things do not go wrong. But be aware that quoted prices don’t cover disbursements and you may need to consult a solicitor anyway if something does go wrong or peculiar with the process.