Investment in Property

World over the investment in property has always been considered a great idea for getting long term returns. As we know generations and generations in Australia as well have built their wealth on bricks and mortar whether its commercial or residential property.

All You need to know before investing in a property

Should I Plan to invest – Is it a good idea?
How to find the optimal investment property?
How to choose the right investment loan?
How to manage the investment?
Role of Tax and gearing benefits.

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Benefits of Investing

Why is property investment a great idea ?

Even for small time investors, residential investment is considered a wonderful option as you can rely on the security that residential real estate can provide consistent, tax-friendly returns in form of rent and enhanced property value from a long term perspective.

What are the benefits in Tax and what is gearing all about ?

You can benefit from generous tax concessions on rental income when you invest in a property. This is a prime factor in making residential property investment a highly favoured option by investors in Australia.

What all can be claim on tax for your investment property ?

Though it is a good idea to check on the tax benefits from a tax advisor, some of the rental property expenses that are usually claimed on tax are mentioned below :

The interest that you pay on your investment loan and any ongoing loan fees.
Strata fees, Council rates, land tax and any corporate fee if applicable.
Cost of Advertising for tenants to rent the property.
Property management fees
Any costs associated with the loan like valuation fees, loan establishment or registration fees or LMI premium.
However these costs may need to be claimed over a period of five years.
Cost of Electricity, gas and water to an extent in certain situations. Though part of these costs will be paid
by the tenant and therefore they cannot be claimed by you as a landlord.
The fee that you pay to your accountant for bookkeeping etc.
The repair and maintenance work for your investment property including the expenses on pest control, gardening
and cleaning services.
The Insurance premium costs for your rental property like public liability insurance, building and contents
insurance and landlord insurance.
Depreciation on the property and some select fixtures and fittings.

It is very important to know that you can claim the above expenses only if your property is tenanted or available for rent. If the property has been taken off the market for some duration for any renovations or for some other reason, you will not be able to claim the costs for that period.

How about stamp duty? Is it tax deductible ?

No. The stamp duty is not tax deductible. However since it is included as a cost of buying the property, it can help to reduce the capital gains tax that is to be paid by you if you decide to sell the property for a profit.

Does it make sense to seek professional tax advice to maximise the tax benefits on an investment property ?

There is no doubt that professional tax advice which is customised to your unique circumstances is beneficial as it will let you know what all you can claim on tax within the purview of Tax Office rules. What more, the cost of having your tax return made professionally is also tax deductible.

What if I decide to do my own tax return and claim my investment property tax benefits ?

Well if you decide to do it on your own, just follow some basic procedures and be very well informed about the tax laws:

Always maintain good records for your investment property as it will help you in maximising the tax benefits from your investment property.
Always keep the expenses for your owner occupied home separate from the expenses of your investment property.
Always save the receipts for any expenses that you can claim on tax. It is very important as if there is a tax audit, these receipts will be needed to prove your deductions.
Keep reading about the tax laws and be fully informed about any new changes.

Gearing in Investment Property Mortgage

The term ‘gearing’ means borrowing to buy an asset. Almost all investors use some kind of gearing in the form of their mortgage to fund their rental property. The interest paid on the mortgage is a major expense but then it can be claimed as a tax deduction if the property is rented or is available for renting. It can significantly reduce the cost of the mortgage.

Negative and positive gearing explained

You’ve probably come across the term ‘negative gearing’ in relation to property investing. When it comes to investing, the term ‘gearing’ refers to borrowing to buy an asset. It is simply a way to describe borrowing to invest. So if you take out a loan to buy a rental property, your investment is said to be geared.

Most investors use some gearing in the form of their mortgage, to fund their rental property.

What is negative gearing?

It simply means borrowing to invest.
When you take an investment loan, your property is ‘geared’.
‘Negative gearing’ happens when the costs of owning a rental property exceed the rent returns you earn.

How does negative gearing work?

Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other income including your wage or salary, to provide tax savings.

The benefits of a negatively geared property

Let’s take an example of a negatively geared property in Australia. Let’s say that Bill owns a rental property generating $25,000 in rent each year. The costs of holding the property, including mortgage interest, come to $30,000. This gives Bill a taxable loss of $5,000, which he can use to reduce the tax payable on his salary.

If you know in advance that your investment will record a loss over the financial year, you can apply to the Tax Office to reduce the amount of tax taken out of your salary. This is called PAYG Withholding Variation and it can provide a real boost to your personal cash flow. You can chat with your mortgage broker about options and with a tax adviser or accountant for more details.

Negative gearing investment properties often plays a significant role in all investors’ strategies. Knowing your investment strategy is important, and getting expert financial advice is smart if you need help identifying the right approach to maximize your profits.

While there are some certain benefits associated with negative gearing, it isn’t without its pitfalls.
When you negatively gear your property, you still record a loss. And a loss is a loss is a loss. Before you commit to negatively gearing your investment property (or multiple investment properties) it is worth considering what the repercussions of doing so are.
Ask yourself:

What happens if you have difficulty filling your rental property at any one time?
What if there is a dramatic turn down in property values and your investment fails to increase in value?
What if interest rates rise very quickly and you have just agreed with your tenants that you will not raise rents for at least 12 months?

These are not questions that should be answered quickly or treated lightly. Take the time to do your due diligence and know how you would cope if any of the above scenarios came true. If you are confident that you could easily handle any losses in income etc, then you are on the right track.

Of course, if you do choose to negatively gear your property, there are some easy ways for you to minimize the risks associated with doing so.

Minimizing the risks of negative gearing

1. Choose your investment property wisely
Buying a property that is located near all the major amenities and appeals to a wide range of tenants should help you to ensure your investment property is never vacant for very long.

2.Manage your income
When managing an investment property, there are times when it will cost you a significant amount of money – when the property is vacant, when it needs repairs etc. So, before deciding on negative gearing make sure you have enough income to successfully manage all the expenses that come with owning a property – not just day to day expenses, but all expenses.

3.Protect yourself and your investment
As a property investor, it is critical that you adequately protect and insure not only your property, but yourself in the event that unforeseen circumstances arise. It never hurts to be prepared for the worst case scenario. You can speak to your mortgage broker or financial adviser to learn more about the types of insurances you should have as a property investor.

Negatively gearing an investment property is not a decision that should be made lightly. Before making any decisions, it is important to consult with a professional.
A mortgage broker can step you through the whole process, identify the risks associated with negative gearing and help you formulate a plan to not only minimize the risks, but tackle any hurdles that you may face during your investment journey.

How positive gearing works

An investment is positively geared if it earns more in rental income each year than it costs to own the property.

Below is an example of a positively geared property in Australia:

A landlord may receive $20,000 in annual rent but only spend $15,000 on the property including mortgage interest. In this instance, the difference of $5,000 represents profit and additional income to the landlord. As this profit is taxable, landlords of positively geared properties need to set funds aside to cover the tax they will pay on their investment each year.

Rental Yield

What is rental yield?

Rental yield is essentially the amount of money you make on an investment property by measuring the gap between your overall costs and the income you receive from renting out your property.

Understanding how property yield works gives you a better idea of the ongoing return you will earn on your investment. It can also be helpful when it comes time to review the rent on an investment property.

When you know the rental yield of a property, you’re also better placed to understand if it is the right place for your investment goals, or if you could earn a higher rental yield with a different property or by investing in another suburb.

How to calculate rental yield

This is the rent return a property earns before taking any property expenses into account. It’s basically the annual rent you earn as a percentage of the property’s market value.

Calculate gross rental yield

Here’s how to calculate gross rental yield:

1. Sum up your total annual rent that you would charge a tenant

2. Divide your annual rent by the value of the property

3. Multiply that figure by 100 to get the percentage of your gross rental yield

Here’s an example of calculating gross rental yield.

Let’s say, you receive $30,000 each year in rent, and the property is worth $500,000. Your gross rental yield is equal to $30,000 ÷ $500,000 X 100 = 6%.

i.e Annual rent ÷ The value of the property X 100

Calculate net rental yield

To calculate net rental yield accurately will involve some extra number-crunching. Follow these steps:

1. Add up all the fees and expenses of owning the property

2. Sum up the annual rent you will receive from the property

3. subtract the total expenses from the annual rent

4. Divide it by the value of the property

5. Multiply by 100

Examples of some of the expenses you might have from your property include:

1. Repairs and maintenance

2. Strata levies

3. Council rates

4. Property management and advertising fees

5. Insurance

6. Depreciation

Do note, interest on your investment loan isn’t usually including when calculating net rental yield. That’s because it relates to your own financial situation – loan interest isn’t directly related to the cost the property generates.

An example of how to calculate net rental yield

Let’s say, you receive $30,000 each year in rent. You pay $10,000 each year in property-related expenses, and the property is worth $500,000.

Your net rental yield is equal to ($30,000 – $10,000) ÷ $500,000 ÷ X 100 = 4%

i.e (Annual rent – costs of owning your property) ÷ The value of the property X 100.

What is a good rental yield?

The answer to what is a good rental yield depends on where you plan to buy.
In metropolitan areas, especially state capitals, gross rental yields typically range from 3-5% [1]. In regional areas, gross rental yield can be 5%-plus.