Generating income and building wealth through property investment is something that Australians love to do. Done correctly, it can offer financial freedom and flexibility and provide an extremely safe asset with excellent potential for capital growth.

If you’re thinking about investing in property for the first time there are some important points to remember.

Start by thinking about your reasons for investing and know your short, medium and long-term goals. Perhaps the goal is short-term rental return, medium-term wealth creation or a long-term retirement plan. You need to understand all of the costs involved in acquiring and holding property and if you are a first-time investor, it’s wise to seek the advice of a professional accountant with real estate investment knowledge to guide you through.

Establish clear goals

Why property? It’s important to consider the realities of property investment – not just the potential benefits. Decide on the level of risk you’re comfortable with, in case there’s a drop in market value or interest rate increase.

Research and calculations

Doing your homework is really important. There’s a lot to consider before you purchase. From choosing an apartment or a house, to selecting a suitable location, plus how much you can afford to borrow. Remember to get advice regarding rental yield and vacancy rates to be better informed and research the property’s potential for capital growth, rental income, yield and ongoing costs – so you can make an informed decision. Consider liveable locations, close to public transport, employment areas, parks and schools, to ensure your property is in demand. Do some ‘what ifs’ E.g., you need to make sure you can cover your loan repayments, plus other costs like council rates, strata and property maintenance, while still maintaining your lifestyle.

Review and update

Monitoring your investment by regular tracking. Review your loan every year or two to make sure you’re getting the best possible deal from your lender. Keeping tabs on your rental income and expenses is a must.

Bring in the professionals

You can do it all yourself, but managing tenants can be time-consuming and tricky, so it might be easier and cheaper to use a professional property manager.

Costing approximately 7%-10% of your total rental income each week, a property manager takes care of the following: 

  • Advertising the property
  • Screening potential tenants
  • Property condition reports- before and after tenancy
  • Routine inspections
  • How and when tenants pay the rent
  • Repairs and maintenance
  • Complaints/evictions.

It’s important to know your legal obligations as a landlord, so check out the state government or Fair Trading website of the state where your investment property is located.

Also, at tax time, it might pay to have an accountant run the numbers, to ensure you’ve claimed all deductions and lodged correctly.

Property isn’t a ‘set and forget’ investment. There’s work involved to keep things running smoothly – especially when it comes to finding the right tenant and maintaining the property. 

Financing your investment

Many new investors leverage on the value of their existing home and tap into their home’s equity to borrow for an investment property.

When looking to invest, always consider ongoing expenses such as levies, rates, property repairs and maintenance and forecast profit and loss, as well as your borrowing capacity and repayments.

If you are relying on the rental income to support your mortgage repayments, it’s wise to be prepared for any potential shortfalls in covering repayments. 

Get an estimate of your borrowing power based on your expected rental income and lifestyle with this calculator.

Ensure you do the analytics

Weigh up the potential benefits in investing in property:  

  • Potential increase in value (capital growth) – common, not guaranteed
  • Rental income from tenants
  • Tax benefits
  • A tangible asset “Bricks and mortar”
  • Less volatile than other investments
  • Potential to increase value through property renovations

With regards to income, you need to decide whether you are chasing short-term yields or long-term capital growth.

There are three key areas of potential: capital growth, rental income and tax benefits.

Capital growth

Basically, the increase in value of your investment property over time, calculated by finding the difference between the current market value and the purchase price. Choosing a capital growth strategy involves holding the property long-term to see growth.

Income and rental yield

Renting out your investment property to tenants, offers an ongoing income stream – to cover all costs and provide a passive income stream. Rental yield is a calculation to estimate the investment property’s potential income and compare properties.

Tax benefits

Tax rules change constantly and to align to your individual financial position, it’s best to seek expert advice tailored to your situation.

Positive gearing 

A property is positively geared when your rental income is higher than the cost of owning the property –making a profit on your investment. 

E.g., Rental income ($35,200) minus property expenses ($20,000) = $14,200

$14,200 would be added to your taxable income.

Note: you’ll need to factor rental income as part of your overall taxable income – and you’ll need to pay tax on this money, so it’s a good idea to save extra funds to cover your yearly tax bill.  

Negative Gearing

A property is negatively geared when the costs of owning your investment property are higher than the rental income you receive – essentially making a loss.

E.g., Rental income ($16,600) minus property expenses ($20,000) = -$3,400

This amount would be deducted from your taxable income. 

Negative geared investors often focus on capital growth as their investment strategy.  

Regardless of gearing, it’s smart to discuss tax options with a professional, to investigate any other   property expenses that could be deductions. For example, borrowing costs, including interest on your investment loan, Council rates, insurance, maintenance (strata) and repairs and property management.  

Most common ongoing costs for an investment property

Council rates

Usually paid quarterly.

Tax

Rental income needs reporting as part of your annual tax return.

Insurance

Landlord and/or building insurance.

Repairs and Maintenance costs

Any repairs and maintenance are the landlord’s responsibility.

Body corporate/strata fees

These fees may apply for apartments or townhouses, and are paid by owners for maintenance of the building’s common areas, building insurance and other shared costs.

Property management fees

When using a professional agent or property manager

Utilities

You may be liable to cover some utilities such as water.

Capital gains tax

Hopefully, when selling an investment property, it would be for a higher price than the original purchase price. The increase is a capital gain, which needs to be reported as part of your income for that financial year tax return. Make sure you get professional advice in this situation.

Investing in property is both exciting and rewarding. If you are ready to invest, speak with one of our agents to assist in your investment journey. 

Acknowledgments: Westpac, Michael Yardney, AMP, Klearpicture