The Benefits of Investing Property.
The Advantages of Investing in Residential Property
Residential property has always been a popular investment option in Australia and has proved a relatively secure investment over the past 30 years. To maximize your returns and ensure long term security however you should always seek independent advice. In general, residential property is considered a fairly low-risk investment.
It is an asset class that historically, over the long term, has delivered satisfactory returns for many investors. Arguably it could be said that property investment has out performed shares and it can significantly affect the wealth of the average investor as there is the potential to leverage the asset using the banks money.
With a well thought out investment strategy , property investment has many advantages. Property can be less volatile than shares – though this is not always case – and it tends to be regarded as safer when other assets are having their value reduced by economic and financial cycles.
It has the potential to create both capital growth as well as an income stream in the form of rental income. There are also tax advantages associated with negative gearing and other means of reducing tax.
However with all investments there are risks. Property prices go down, as well as up, and the management of the asset is imperative to good returns. Good tenants can sometimes be hard to find, especially ones who look after your investment property and pay their rent on time.
Property investors need to take into account the interest rate environment and how increases in rates might affect their future net returns and the demand for their property should they wish or need to sell. Also they should compare the yield from their investment property to other investment opportunities such as shares for instance ensuring their investment in property is the best option.
Some of the advantages of investing in Residential Property are listed below, remember before making any decision to invest in property we suggest you seek independent advice.
The property price does not have daily or weekly price changes which makes it easy to stay focused and maintain your investment strategy.
Long Term Capital Growth
Capital growth is the increase in the value of your property over time and is one of the main reasons people invest in residential real estate.
Historically Australian residential property has experienced strong capital growth with a long term average growth between 6% to 9% but periods of minimal growth and even decline are experienced from time to time. The nature of the property cycle suggests it is prudent to be thinking long term looking to hold your investment property over a period of 10 years or more.
Your best chance of achieving good capital growth on the Northern Beaches of Sydney is to buy the right property in the right location, at a realistic price.
Long Term Investment
Property is one of the best long term investments and one which many people like the idea of for funding their retirement. This is a good strategy as property over the long term seldom decreases in price, and also can be utilised in many practical ones, like helping family.
Greater Level of Gearing
When you borrow to invest in residential property you can leverage to a larger extent in comparison to other asset classes. Banks and other lending institutions will normally allow you to borrow up to 9o per cent of the value of the property, thus enabling you to purchase a more valuable asset without a large financial outlay. Each financial institution have their own LVR’s which plus each individuals requirements will determine the appropriate level of gearing. Your Mortgage Broker, Accountant or Financial Advisor will be able to direct you on these decisions.
Sydney Housing Demand
In Australia there appears to be an ongoing housing shortage. The Northern Beaches and the rest of Sydney’s greater metropolitan areas are no exception. This should mean that demand for rental properties should keep rents growing and house prices increasing.
The investment properties yield is an important measure in determining the potential return of an investment, this can then be compared to other opportunities. The yield is calculated by dividing the annual rent it generates by the price you paid for the property, times this by 100 to express as a percentage. This of course is only part of the future earning potential it must be viewed along side the expected capital gain. Rental income forms a consistent cash flow which helps to service the costs associated with maintaining the asset while paying down the borrowed funds over a period years.
Your property can be negatively geared if your costs, including interest charged and other claimable costs and including depreciation, are greater than the rental income generated from that property. Costs do not include repayment of the loan principal which results in a net rental loss, this is the cost you will need to pay to maintain your investment property.
This net rental loss can be off-set against other assessable income. This will either reduce your tax payable or may result in a tax refund.
Negative gearing deductions are most beneficial to income earners in high income brackets where they are in the top marginal tax rate, although it can be beneficial to most medium income earners.
If you have a net rental loss of $100 per week on an investment property, it could be reduced by 37% if you are in that tax bracket or $37 to $63 net loss after negative gearing. You should always seek expert financial advice from a finance expert or Accountant to make sure the purchase is within your budget while still meeting your investment strategy.
Using the Equity in your Investment Property to buy another property
Over a period of time your investment property will reach a stage where it makes a net rental profit due to your loan reducing and rental income increasing. This will result in your property being positively geared and the tax advantages will no longer be available. However you will have more disposable income which certainly isn’t a bad thing.
You may decide to use the increased equity and extra income to invest in another investment property. There are many options available, this where having a solid investment strategy helps you plan your future direction.
There are certain tax advantages available for property investors such as tax deductions for costs associated with purchasing and the ongoing management of the property
1. Capital Gains Tax
Capital Gains Tax (CGT) is the tax charged on capital gains that arise from the disposal of an asset – including investment property, but not your place of residence which was acquired after September 19, 1985.
You’re liable for Capital Gains Tax if your capital gains exceed any capital losses in an income year. This includes brought forward capital losses from previous years.
The capital gain on an investment property purchased on or after October 1, 1999, and held for more than one year, is taxed at 50 per cent of marginal tax rate normally applicable to that extra income. This means a maximum rate of 22.5 per cent if you’re in the highest tax bracket.
The capital gain is the profit you’ve made over and above the original purchase price plus capital expenses such as subsequent renovations. As with all tax matter accurate records and the appropriate advice is recommended to ensure a very positive outcome.
Property investors can also claim depreciation on various items within their investment property ovens and washing machines and other fixtures and fittings. This is the same principle applied to business assets and involves recording the cost price of the asset and then writing off a portion of that asset over a number of years.
This yearly depreciation amount is claimed as a expense and offset against rental income. The ATO has methods and rates to be applied to various asset classes. There is also depreciation applicable to Capital works like improvements to the property.
It is imperative you engage the services of a registered quantity surveyor at the outset of your property investment to ensure you are getting the best depreciation allowances available thus gaining maximum write-offs.
4. Claimable Expenses
All expenses associated with managing your investment property (including interest repayments, repairs and maintenance, and advisor fees) are fully tax deductible. You can also claim general wear and tear and fixtures.
Expenses you can claim as an immediate deduction
Expenses for which you may be able to claim an immediate deduction in the income year the expense was incurred include:
• Advertising for tenants
• Body corporate levies and other charges
• Council rates
• Electricity, gas and water charges
• Cleaning, gardening and lawn mowing
• Building and contents Insurance
• Loan interest
• Agent fees and commission
• Pest control, servicing and maintenance
• Security patrols
• Land Tax
• Public liability and landlord insurance
• Phone and other incidentals
• Repairs (some repairs may be deemed capital in nature).
Expenses deductible over a number of years
Some expenses that you incur may be claimed over a number of income years. These may include:
• Borrowing expenses on property loans
• Loan establishment fees
• Title Searches
• Mortgage documents and mortgage broker fee
• Stamp duty
• Depreciation on carpets, furniture and curtains
• Deductions for capital works expenses such as extensions, alterations and structural improvements.