Looking to invest in property?
Australians love property investing and this is simply because property investing has proven to be one of the safest and most trusted ways for every day Australians to create and hold onto wealth.
9 out of 10 Australians retire on an income less than the median wage. Investment properties offer large tax savings – all cost depreciation and interest charges are tax deductible items.
Smart investors use their tax savings to help them build their property portfolio.
As many Australians already know, investing in property can have many advantages. It can help you secure your future, act as an additional income stream or improve your tax efficiency.
In addition, a few key indicators in the current property market make investing even more compelling.
- Current market situation
- An undersupply of housing combined with high demand is making it easier to find tenants.
- Rental prices are being pushed up as a result of strong demand and low supply, giving many investors better returns.
- Decreasing interest rates mean lower mortgage repayments for investors, while rental returns are still strong
Australia’s population growth
As of September 2009, Australia’s estimated resident population was 22.1 million. The strong increase in underlying demand for housing has primarily been driven by a very large increase in net overseas migration, as well as historically fast natural population growth.
In the year to September 2009, Australia’s net overseas migration (297,369) accounted for two thirds of Australia’s population growth.
Over the twelve months to September 2009 Australia’s population grew by 2.1 per cent. In addition to net overseas migration, there was a large increase in the natural population of 154,000 people.
Why Invest in Property?
How do people grow wealth in property?
A lot of people invest in property because of rent returns and the fact it may reduce taxable income. These are small advantages and by products of the real power of property. The reason why 85% of the BRW rich list made their wealth from property is because of Capital Growth. Properties in Australia over its history double every 7-10 years and closer to 7.5 years.
This means buying good properties in growth areas and holding onto those properties long term and earning compound interest on you investments. That is growth on growth. For example if a property is purchased for $300,000 and is growing by 10% per year then after one year it would be worth $330,000. The next year the property increases 10% again but this is on $330,000 not the original $300,000 taking the value to $363,000 in year 2. If you had 1 million dollars of property and held those properties for 10 years and on historical growth rates your portfolio would be worth 2.71 million or a gain of $170,000 per year.
Why are so many investors looking at South East Queensland to build wealth in property?
The biggest reason is the population growth and Supply and Demand. At present growth rates are estimated to be 2000 houses per year short on what will be required. Great weather, employment, infrastructure, tourism and pro-active state and local governments are reasons property prices are driving upwards. This is not expected to slow. There are other hotspots booming at present in Australia. The secret is to be able to recognise these areas and select good investments there.
Most Australians handle their property management through a real estate office. Most real estate offices provide an excellent service by marketing for tenants, arranging for rent to be collected, fixing minor repairs and providing a useful summary for tax purposes at the end of the year.
Stamp duty – this will usually be the biggest additional cost of acquiring a property – often up to six per cent. Stamp Duty is a capital cost and is added to the cost base of the property.
Legal/conveyancing fees. These are normally deductible if the property is for investment purposes.
Property as an investment has many benefits. When calculating the return, ensure that you allow for the following charges:
Interest costs on the borrowings.
Insurance (items you provide such as drapes, carpets, appliances are contents and will need to be insured).
Rates. Most residential tenancies do not allow for the payment of rates and other government taxes; therefore they need to be paid by the property owner.
Repairs. Things do go wrong and occasionally need to be repaired or replaced. Maintenance items are usually tax deductible – but be aware that property improvements are deemed to be capital expenditure and are added to the cost base of your property and are, therefore, not fully tax deductible.
Body corporate. These fees are payable in most unit and apartment complexes. The level of these fees can sometimes be quite high, particularly if there are large or expensive to maintain common areas such as gardens or pools.
The above costs are indicative of the types of expenses you will incur – but there may be others.
Successive Australian governments have helped Australians to put together an investment portfolio by offering a range of valuable tax-driven benefits. Most costs associated with investment property are allowable tax deductions. Where the rental income does not fully cover the expenses, then this is referred to as negative gearing.
Finally – and most importantly – remember that property investment is fundamentally that – an investment. Far too many people are seduced into believing that their wonderful investment will eventually become a “second home” and select a house accordingly. Often, they can do better by investing in another area or even type of property, eventually realising an investment gain and doing far better than they would from a purchase driven by emotions.
Investing in Property
When it comes to making the most of an investment property, finding the right home in the right location is only half the battle; finding the best finance is other half. Many options are available and the choice of home loan will ultimately depend on your particular investment strategy and the type of property. Here are the three main choices.
Negative gearing and tax implications
If you’ve got money to invest, one of the options you may consider is negative gearing.
With correct financial advice and with the selection of the right property, negative gearing can provide great tax advantages. That’s great if you’re thinking about entering the property investment market for the first time, or want to increase your investment portfolio.
How do you negatively gear a property?
A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. Put simply, your investment must make a loss before you can claim a tax benefit. It works not only for property, but also shares and bonds.
Investment expenses that you can claim as a deduction
Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:
1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and recurrent expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, gas, water, gardening and insurance.
2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once.
Rental income on investment property $2,000 per month
Expenses (interest, maintenance etc) ($2,500) per month
Council rates and other expenses ($100) per month
Shortfall $600 per month
This example shows how an investment asset may be negatively geared. The net loss of $600 per month ($7,200 per annum) may be claimed as a tax deduction.