With so many changes afoot in the property market at this time, you might be wondering where to begin if you want to start investing in property.
However, whatever the conditions in the market, your approach should still follow a well-thought-out template that can stand tall during any stage of the property cycle.
Make no mistake, planning is everything if you decide to invest in the property market, and you can’t expect to do well if you don’t seek out advice from professionals. Your Growthfront mortgage broker is here to set you up on the starting blocks, but without further ado, here are the most important things to know if you plan to start investing in property.
Investment Considerations
Like with any investment, the decision to invest in property means you should reflect on your personal circumstances, as well as your goals and the like. This means you will want to take into account things like your:
Financial standing
Investment goals
Borrowing power
Buying power
Capital Requirements
Deposit
When thinking about the above, there are a series of questions you will probably want to give some thought to. These might include:
Will you be able to meet your repayment obligations for an investment property, even when it is vacant and/or interest rates rise?
Do you plan to, and do your circumstances allow you to keep the investment property for the long-term, or do you one day intend to live in the property, or use it to trade up?
What is your borrowing capacity and how much can you afford to borrow from the bank?
Do you have the budget to invest in a property with appeal to a wide range of tenants?
Do you know how much money you will need to maintain the property, and cover other ongoing expenses?
Do you have funds available to put towards a deposit for the property, or do you have the option to put forward equity in a home in lieu of a deposit?
You might not know the answer to each of these questions, but fortunately, with the help of a Growthfront mortgage broker, we can work with you to address each consideration.
The Most Important Criteria for an Investment Property
When it comes to finding the perfect investment property, there are no shortage of factors to consider. In a nutshell, however, these can be broken into two main themes - the property’s appeal to tenants, and the affordability of the property.
In terms of the property’s appeal to tenants, a good starting point is to read our guide on how to find your perfect investment property. The key takeaway here is that your property needs to appeal to as diverse a group of prospective tenants as possible.
If your property does not capture the interests of a broad group, then you are contending with less demand, and ultimately, you will have less negotiating power over the rent you seek.
Most of all, you want to attract a certain type of tenant - what we might call a ‘quality’ tenant. That is, someone responsible that looks after the property, pays the rent in full and on time, and follows all the conditions as set out within the lease. An investment property with more appeal increases your odds of finding a ‘quality’ tenant.
On the other hand, the affordability of the property is what determines whether you will make a return on your investment, in addition to whether you can maintain your financial obligations and the upkeep of the property.
Most property investors negatively gear their property during the first few years of ownership. This means that the costs associated with the property exceed the income generated from the rent of the property. Fortunately, investors are afforded generous tax breaks for a negatively geared property.
Nonetheless, a loss is still a loss. And that means you still need to think about your finances, including cash flow. It is common to have periods where the property is vacant, and you will still need to pay ongoing expenses related to the upkeep of the property and ownership related matters like rates, body corporate fees, and so forth. This means you must be certain you can afford the property.
The Costs of an Investment Property
In our beginner’s guide to investing in property, we mention some of the one-off (upfront) costs and ongoing expenses that you are likely to face as an owner of an investment property.
We will now go through these likely costs in more detail, so you have a better understanding of what your commitments might entail.
One-off Costs (upfront)
Stamp duty: A state-based tax based on the purchase price of the property. Take note, some state governments, like New South Wales, are currently proposing a property tax in place of stamp duty. This will shift upfront costs to an ongoing expense.
Legal and/or conveyancing fees: One of the most important things you should do when buying a property is engage a lawyer and/or conveyancer to ensure the property title is transferred into your name, and that all other legal-related matters are ticked off.
Loan application fees: These fees will vary from lender to lender. They can also extend to similar fees like lender’s valuation fees, and Lender’s Mortgage Insurance (LMI) where you borrow 80% or more of the price paid for the property.
Pest and building inspection: You will need to hire a professional to inspect the structure of the building to ensure everything is in compliance, and that there are no defects or pest control issues that could cost you a fortune later on.
Strata searches: This type of search looks at whether there are any disputes or outstanding repairs in relation to a townhouse or apartment complex, and whether any repairs have been deemed substandard.
Ongoing Costs
Loan interest expenses: The interest component of the loan that you pay each month. If you have a loan with a variable rate, beware that your interest expenses will increase if the lender increases the interest rate.
Council and utility rates: These are taxes designed to cover the provision of services and infrastructure to the property.
Maintenance and repairs: As the owner of the property, you are financially responsible for any repair work or maintenance that might be required. This includes the periods when the property is rented, as well as cleaning or maintenance between tenants.
Body corporate fees: You will pay body corporate fees for townhouses or apartments, and they are designed to cover the cost of managing and maintaining common areas across the complex, as well as insurance, repairs, works, and shared utilities.
Real estate management fees: From letting and advertising costs, to lease expenses, general management fees, and even commission that might be payable upon finding a tenant, you need to take into account the expenses of the property manager.
Landlord insurance: This type of insurance product offers a landlord protection from some of the risks associated with their rental property.
Land tax: This tax is an annual expense in all states and territories except the Northern Territory, and it is charged against land you own, or co-own, above a certain value.
The Tax Implications of an Investment Property
An investment property comes with a number of tax considerations.
In some instances, you can benefit from generous tax breaks. This is due to the fact that the ongoing expenses mentioned above may be treated as tax-deductible. They are expenses incurred while generating income from an asset (i.e. your investment property).
What’s more, if your investment property is negatively geared, you may effectively claim a taxable loss in the form of the shortfall between the rent you earn as income, and your expenses to manage the property. This taxable loss can be used to reduce one’s overall taxable income.
As always, you should speak to a licensed accountant for specific advice that is tailored to your financial circumstances, and the Growthfront team is happy to refer you to one of our trusted partners.
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