Investing in In Rental Properties
Property investment allows for wealth generation, it gives many people a real and tangible asset that they can touch and feel, and it brings with it added security for both the investor and their loved ones. Plus, for many investors it allows them to diversify their investment portfolio with relative ease.
However, before you start investing, it is recommended that you know why you are seeking to invest in the first place. This then allows you to set yourself milestones and goals and to get the most out of your investment
portfolio. Knowing why you are investing also gives you more drive and conviction to make these milestones and goals a reality. Plus, it dictates to how you invest and to your overall investment strategy.
Let’s look at six of the most common reasons why people invest in property, so that you can then decide why you’re seeking to invest.
- Increased Security
You may be single, living with your partner or married. You may have young children or a grown family or even ageing parents. No matter what your family circumstances are, investing in property can improve your financial independence. Property investment typically does this by providing you with an asset that could appreciate over
time. This means that you are not just relying on your income on a day-to-day basis, but instead, you are making your income work for you and building additional wealth, so that you can then use this to create the lifestyle that you wish to have. Plus, if you need additional funds for any unforeseen circumstances that arise then you can use
the equity in your investment property, or even sell it to help you overcome any financial issues.
- Retirement Savings
Investing in property can give you financial freedom and independence so that you don’t have to rely on a government pension when you retire. This is created by:
•• Collecting rent from properties that are positively geared where the rent paid is higher that the mortgage
repayment due; and
•• The selling of investment property at a higher value than the initial purchase price, which is referred to as increased capital value.
- Increased Income
Owning an investment property can increase your income if your property is positively geared. Positive gearing occurs when the amount of rent you collect is higher than the outgoing cost of the property. The amount you are left with after expenses have been deducted is then added to your existing income so that you earn more. The amount that you’ll earn from your investment property depends on the initial cost of the property and how much of the property is under finance, as well as the amount of rent collected and your ongoing costs.
- Tax Benefits
Basically, your investment property operates like a business. Some expenses are deducted from the amount of revenue earned. In this case, the revenue you earn comes from the rent that you collect. Some charges and costs associated with your investment property are tax deductible, this includes the following:
•• Bank charges and fees.
•• Government charges – council rates and the emergency services levy etc.
•• Service and maintenance charges – gardening, building and equipment repairs etc.
•• Accounting and professional fees – estate agent, quality surveyor and bookkeeping.
•• Insurances – property and mortgage.
•• Advertising costs for tenants.
•• Corporate body fees.
•• Borrowing fees – stamp duty, brokerage fees, title searches and property valuations.
•• Utility charges – water and the connection of any services.
Exceptions to this rule include things like capital improvements, like a renovation expenses of a property. This is why it is important to obtain tax advice from your accountant so you can ascertain what you can and cannot claim before you start carrying out any renovations. If your investment property runs at a loss, you may be able to offset your losses against other income at tax time. This is known as ‘negative gearing’. For example, let’s say you earned $83,000 last financial year, and you own three investment properties that all ran at a loss of $5,000 each. You would then be able to claim a $15,000 loss at tax time and this would reduce your taxable income to $68,000. In some cases, this can reduce the amount of tax that you pay significantly, especially if your reduced income places you in a lower tax bracket, which means that you paying less tax per dollar.
The Australian Government is currently reviewing ‘negative gearing’ legislation and may make changes to what investors can and cannot claim as a tax deduction. For more information on changes to negative gearing call the ATO on 13 28 65.
Have you ever looked at historical property prices and noted how much they’ve changed over time? For instance, in
the 70’s you could have bought a property in Sydney for $80,000, now the same property could be worth $700,000 or more. The difference between the purchase price and the sale price of a property is referred to as the ‘capital growth’, where the value of the property has appreciated over time. As a property investor, you will want your
purchase price to be the lowest that it can possibly be and the sale price to be as high as it can. This then gives you the most capital gain. For example, the capital growth on the Sydney property we mentioned earlier would be a minimum of $620,000 over the years of ownership.
- Rental Return
Rental return, also known as rental yield, is typically the amount of rent that you collect expressed as a percentage of your property value. For example, a property purchased for $255,000 and rented for $355 per week would return a rental yield of 7%. In fact, most property professionals recommend that for your investment to be worthwhile,
it should produce a rental return of at least 5% per annum. For instance, if the $255,000 property we mentioned earlier was rented for $215 per week then you would be getting a yield of 4.4% pa. Most investment professionals would advise against buying this property, as the return is not high enough for it to be a viable investment.
If you’re unsure of how to calculate rental return on a property you are looking at buying, then go online and type ‘rental return calculator’ into a search engine. This will make your task so much easier. Many investors are now utilizing the rehab valuation software to calculate anything that relates to investing,rehab and rental income.