March 3, 2014
Some say it’s best to own your first home before you invest in property, others buy an investment property first, and rent somewhere else. Regardless of the purpose, as a way to build wealth, investing in property has long been an extremely popular choice for Australians. If you’ve you’re thinking about buying an investment property, here are some key considerations:
The aim of investing in property is to return a profit. Ideally the rent you get should be more than the cost of the loan and maintenance. That means your property is positively geared. But your property may need to be negatively geared if the rental income doesn’t entirely cover your loan repayments and other expenses. If that’s the case you need to make sure you have enough spare cash flow to pay the difference each month
When you have an investment property, all the costs are tax deductible: interest, insurance, maintenance etc. These can be deducted against future annual revenue from your property which is how people show a loss on their investment property. You can offset that against gains in other areas (negative gear), but remember that when you sell, you’ll be taxed on any capital gain you make.
The tax benefits of negative gearing are often seen as the key drive for doing it, but experienced investors argue that negative gearing is not a good sole rationale to invest in the first place. Investing is about making money, not losing it!
When buying, location is always key, but timing is critical when investing because you often make your money when you buy not when you sell. So if you can buy the right property in the right suburb at the right time, you’ll be set for strong investment growth and returns. But that means you have to study property markets well to seize on opportunities.
Don’t forget that the rental market can shift quickly, so it’s wise to have a spare month’s rent up your sleeve for those times when your property is vacant.
In order to be a savvy property investor, you need to be good with figures and interested in following real estate market trends. You need to monitor the interest rate environment and know how higher rates might affect your net returns. You also need to make sure the return (or yield) from your property stands up against the return you might have made with shares or other investments.
That said, investing in property has the potential to generate capital growth (an increase in the value of your asset) as well as rental income. And you can access some tax advantages through negative gearing.
It’s a popular Australian wealth strategy, but there are no guarantees. Property prices go down, as well as up, and good tenants who pay on time and take care of your investment are not always easy to find. Like buying property, the best strategy is to arm yourself with as much knowledge as possible.