Property Investing
A residential property is a house, townhouse, terrace or unit (i.e. a building suitable for use as a dwelling – this includes the land) which the owner does not use as personal residence, but rather with the intention of it being rented to tenants (for non-business purpose). This allows the investor to benefit from both tax advantages and rental income from the property.
If an investor borrows money to buy a property and the combination of the interest on the loan and costs of maintaining the property add up to more than the income earned from the property’s rent, the investor can deduct the shortfall in interest repayments from thier other income for tax purposes.
The principle behind negative gearing is that money paid towards interest on the loan and expenses incurred in maintaining the investment (e.g. rates, strata, insurances etc.) is money spent to earn tax assessable income.
Negative gearing is one of the best forms of financial leverage whereby the investor is using a small amount of their own money to purchase an investment, while two other parties (the ATO and Tenant) contribute a large percentage towards expenses. On top of that, 100% of the capital growth belongs to the investor!
The principle behind negative gearing is that money paid towards interest on the loan and expenses incurred in maintaining the investment (e.g. rates, strata, insurances etc.) is money spent to earn tax assessable income.
Negative gearing is one of the best forms of financial leverage whereby the investor is using a small amount of their own money to purchase an investment, while two other parties (the ATO and Tenant) contribute a large percentage towards expenses. On top of that, 100% of the capital growth belongs to the investor!
In our experience, provided your property is located in a “high rental demand” area, you shouldn’t have a problem finding a suitable tenant. This is particularly true of the lower end of the rental market where the rent amount is more affordable. A number of factors will contribute to an area having low vacancy rates, including being close to schools, major transport facilities, workplaces, shopping centres and so on. Also with the right property management in place, vacancy should not be a problem. A good property manager should have no difficulty in finding a regular and suitable tenants.
If this is a concern to you, then you will have more peace of mind by taking a loan which is fixed over a certain period of time (3-5 years). By doing this, it gives you two advantages:
- The amount of interest paid will remain constant for the duration of the fixed term, even if interest rates increase.
- Due to the fact the amount of your repayment is known in advance, it is easier for you to plan ahead.
Thanks to our parents, family or well-meaning friends, we have been conditioned to fear debt and instructed to pay cash for everything. While there is “some” truth to this belief, it should not be taken as a blanket statement where all debt-is-bad and should therefore be avoided. There is such a thing as good debt and bad debt. Consumables such as televisions and holidays can destroy wealth (bad debt), whereas, debt for assets such as investment property can build wealth (good debt).
There are two principles that will ensure your security when it comes to borrowing;
There are two principles that will ensure your security when it comes to borrowing;
- Only borrow to purchase appreciated assets.
- Make sure your debt is manageable.
Experienced investors understand that time is part of the strategy. It takes patience and time to build real wealth. Your mindset needs to expand beyond the timeframe of one birthday to the next if you want to achieve REAL wealth.
With the right property manager, tenant difficulties should be reduced to a minimum. There are comprehensive insurance policies on the market that will protect your property against most forms of damage, these include:
- Default of rent
- Departure of tenant without notice
- Denial of access to property by tenant
- Breaking of lease
- Malicious damage by tenant
- Theft, and many more…
Maintaining control of your investment does not have to mean active involvement. Once a property has been purchased, your involvement can be reduced to a minimum through the use of an effective property manager.
The right kind of property manager will save you time, money and headaches. Managers can assist you in some or all of the following areas:
The right kind of property manager will save you time, money and headaches. Managers can assist you in some or all of the following areas:
- Maintenance
- Tenant Screening
- Rent Collections
- Lease Preparation
- Property Inspections
- Tenant Relationship
Cash deposits are not necessary when there are sufficient assets to borrow against (i.e. cross-collateralisation). For example, if you own your own home or have sufficient equity in it, the banks will allow you to use this to borrow against for your investment property. So, there is no need for you to “save up for a deposit”. In fact, it can take you a long time to save for a deposit and by the time you have enough saved, property values may have increased.
There is no right answer to this question as it should be based on each specific situation. An important consideration with this type of investment is it’s tax effectiveness. It may therefore be wiser (and more efficient) to have the investment owned by solely the higher taxpayer, however we recommend you speak to an accountant before making this decision.