INVEST IN PROPERTY
Investment properties are often bought with a goal to make money, usually through renting a place to someone else. If you’re looking to invest in the Aussie property market,here are some key points to consider at any age.
Australia currently faces a chronic housing shortage with soaring prices and rental shortages and purchasing an investment property can be a smart way to get on the property ladder and grow your wealth long term. Considered to be a relatively stable and lower-risk investment, purchasing an investment property also comes with a number of potential benefits, including
- Increasing in value over time (also known as capital growth)–not guaranteed but historically common
- Income from renting the property to tenants
- Tax benefits
- Investing in “bricks and mortar” – a tangible asset is sometimes seen as more reliable and desirable
- Traditionally less volatile than some other investments
- Opportunity to increase the value of your investment through renovations and works on the property
With these potential benefits also comes some considerations to be aware of when deciding to invest in property.
There is always a risk of investing in a property that doesn’t deliver a return, or even losing money on the investment.Buying property also has a high-value entry point compared to other investments. To purchase a home the minimum investment is often hundreds of thousands of dollars and also involves most people taking on debt.This initial outlay of funds maybe a barrier for some investors.
PROPERTY INVESTMENT STRATEGIES
For property investors, there are three key areas of potential: capital growth, rental income and tax benefits. When thinking about your investment strategy, it’s important to understand which of these elements – either individually or as a combination – are most important for you.
CAPITAL GROWTH
Capital growth is the increase in value of your investment property over time, calculated by finding the difference between the current market value and the purchase price.
For Example:
- Sam purchased a property for $500,000 ten years ago
- It is now worth $700,000
- Sam has achieved $200,000 in capital growth
RENTAL YIELD AND INCOME
As an investor, you are likely to rent out your property to tenants, offering an ongoing income stream. For some investors, this is the main goal – to comfortably cover all costs and provide a passive income stream. Rental yield is a calculation to estimate the potential income from an investment and to compare properties. It is often calculated as either gross rental yield (a simple view) or net rental yield (a complex but more accurate view).
GROSS RENTAL YIELD EXAMPLE:
- Brett purchased an investment property for $500,000
- He rents it out at $500 per week
- The gross rental yield is the annual rental income ($500 x 52) = $26,000 / $500,000 x100 = 5.2%
TAX BENEFITS
The third factor that needs to be considered by any investor is tax implications. As tax rules change constantly and every individual has a different financial position, we recommend you seek expert advice tailored to your situation.
NEGATIVE VS POSITIVE GEARING
If you’re thinking about investing in property, you’ll need to know about ‘gearing’. It’s important to understand what it is, as well as the benefits and risks that come with it. There are two types of gearing you need to know – positive and negative gearing..
| Positive Gearing | Negative Gearing |
| Positive gearing is when the income from your investment property is higher than your interest and other ongoing expenses, so you are making a profit. | When a property is negatively geared, it means the cost of owning is more than the income it generates. |
| As an example, let’s imagine Peter purchase an investment property for $600,000 located in Brisbane CBD | Say George purchase an investment property in Melbourne CBD for $440,000 and receive $350 per week in rental income. |
| Say he receives $550 per week in rental income from your investment property | And his property expenses for the year comes to $420 (things like mortgage repayments, strata and repairs). |
| And your property expenses for the week come to $500(things like mortgage repayments, strata and repairs). | Weekly Rental income $350 minus property expenses $420 = -$70 weekly short fall |
| Weekly Rental income ($550) minus weekly property expenses ($500) = $50 weekly cash-flow | His property is negatively geared by $70 p.w/$3,640 p.a |
| Peter’s property is positively geared by $50 p.w/2,600 p.a. | This amount would be deducted from George’s taxable income. |
| This amount would be added to Peter’s taxable income. | The Advantages of Negative Gearing:
|
The Advantages of Positive Gearing:
|
CAPITAL GAIN TAX
Capital gain is the difference between what you paid for an property purchase (less any fees incurred during the purchase) and what you sold it for (likewise less any fees incurred during the sale).However, if you’ve owned the property for more than 12 months, you may be eligible for concession. Capital gains tax is a part of your income tax. And so your net capital gain forms part of your assessable income in whatever tax year you sold your property.
HOW CAN I USE MY HOME EQUITY TO INVEST?
Thanks to rising property prices, many Australians are using the extra equity in their homes to refinance and, you may be able to use your equity for:
- Deposit of an investment property
- Renovate your current home
- To invest in shares or managed funds
- To buy new car, boat or going on a holiday
- Debt consolidation
REFINANCE
You can save a lot of money by switching investment house loans and getting a lower interest rate. Not only that, but you might be able to obtain a loan that better fits your changing demands and lifestyle. When was the last time you checked to see if your house loan was still competitive? It’s possible that you’re stuck with an out-of-date mortgage with a high interest rate and little choices.
BUYING AN EXISTING INVESTING PROPERTY OR “OFF THE PLAN”
What makes a good investment property will come down to three key Fundamentals: rental yield, capital growth potential and underlying demand.Whether you’re looking to buy new or old, we can usually help you get approved for a mortgage to buy one.Rentvesting: Investing while renting When you can’t afford to buy the home you want, rentvesting is a good alternative. You keep renting and buy an affordable investment instead.As property prices in Australia’s capital cities grow, Rentvesters keep renting in an area they like living in and buy a more affordable investment property some where else.
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