Investing in the property market

Are you thinking about buying an investment property? Buying a property that you do not plan to live in can help you increase your wealth and accelerate your financial wellbeing. Property is usually viewed as a long-term investment with many advantages. It is, however, important to understand how property investment works, the costs involved and the potential risks before you decide if this is the right option for you.

How it works

An investment property is a property you buy with the intention to earn an income from it. Usually this is by renting it out to tenants. Another way people make money from investment properties is by ‘flipping’ them. This is when you buy a property, renovate it and sell it for a profit. Buying an investment property works similarly to buying a home to live in with a few key differences. When you buy an investment property, you may not be eligible for the same government schemes, you are looking for a property that will be desirable to a tenant instead of one that fits your own needs, and there may be extra fees and charges associated with maintaining the property, like a leasing agent or property manager. It’s also important you seek advice at tax time as you may need to pay tax on the rental income you earned or capital gains tax on an investment property you sold. You may also want to ask your tax accountant if you can claim certain expenses related to your investment property.

Rent-vesting

Rent-vesting is a strategy some home buyers use when they can’t afford their dream home yet. It’s where you rent a property to live in that’s right for you and your lifestyle, while you own an investment property that’s right for your budget. Before you can afford the home that will support your lifestyle, you can buy a more modest investment property in a more affordable area. The property you buy can then be rented out to tenants and the rental income can be used to pay off some of your home loan or fund your lifestyle. You then continue to rent a home in an area you love.

When your financial situation improves, you can then choose to upgrade and move into your dream home or use the equity and rental income from your investment property to fund a second property that better suits your needs.

Stay-vesting

Stay-vesting is when you buy an investment property while still living at home with parents or relatives. People who are still living at home paying board or cheaper rent might consider this option. It means you can continue to enjoy the benefits of living at home with cheaper living expenses while earning rental income and building equity from your investment property. When your financial situation improves, you can choose to move into your property yourself or upgrade to a home you want to live in.

While stay-vesting might be a choice for some, it is not an option for everyone and it’s important to consider if your current living situation is stable, beneficial and comfortable for everyone in the household before choosing to stay-vest.

Capital expenses

Expenses you incur when purchasing, acquiring, selling, or disposing of your rental property are capital expenses. You may be able to include capital expenses when calculating the 'cost base' of your property. This can help you reduce the amount of CGT you pay when you sell your property.

Capital expenses include:

• conveyancing costs paid to a conveyancer or solicitor

• title search fees

• valuation fees (when it is a private valuation conducted by your solicitor)

• stamp duty on the transfer of the property.

Benefits & things to consider

Buying an investment property is a big decision. It’s important you have considered the benefits and the possible risks before purchasing a property. As always, it’s important you speak with a professional to receive individual advice tailored to your circumstances.

Benefits

• Capital growth – if your property increases in value, you will benefit from a capital gain, however you should also consider the tax implications at the time you sell the property

• Rental income – The rent payments you receive can cover some or all of your loan repayments

• Rent-vesting – You can buy what you can afford to buy while renting where you want to live

• Stay-vesting – You can make the most of living with family while building equity on the property you own (this option isn’t viable for everyone)

• Tax advantages – you may be able to offset property expenses against rental income, including interest payments.

Things to consider

• Extra costs – There are additional taxes, annual levies and costs associated with owning an investment property

• Government assistance eligibility – You may not be eligible for government assistance schemes like the First Home Owner Grant

• Interest rates – a rise in interest rates on your variable loan will mean extra loan repayments which may impact your net income (or loss) from the rental property

• Time commitment – You will still need to invest time and money into managing and maintaining the property

• Vacancies – There may be periods of time when the property is vacant, and you will still need to cover your loan repayments as well as the costs you pay for where you are living

• Value loss – if the property value decreases below what you paid you could end up with a shortfall and owing more than the property is worth.

Costs

There are ongoing costs you might need to pay when you own an investment property.

They may include:

• Body corporate or strata fees

• Building insurance

• Council rates

• Land tax

• Landlord insurance

• Property management fees (if you are using a real estate agent)

• Repairs and maintenance costs

• Water rates

Speak to us today if you have any questions.

Source: It’s my home

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