Thinking of property investing? Read this before you do

1) Learn about investment loans

Unlike a home loan, costs associated with an investment loan are tax-deductible (eg interest, repairs, rates, depreciation, etc).

Many investors use Investment, Interest Only loans to structure thier lending for business and property investment.

Principal and Interest loans can also be used, however, the ATO will not allow principal repayments to be deducted.

It can be possible to extend interest-only loan terms, at the same lender, or at a new lender via a refinancing process.

This allows the property asset to do the hard work – the loan size stays the same level, but due to inflation and demand, the property may well continue to appreciate in value, creating equity.

2) Know about tax and negative gearing

In Australia, if you earn less from an investment property than it’s costing you, you’re said to be negatively geared. The motivation to be negatively geared is that it reduces your taxable income and you accept a short-term loss in the hope of a capital gain later.

However, be aware that any rental income will generally increase your taxable income. Another key difference is that any appreciation in the value of an investment property (capital gains) is taxed.

3) Know ow much a property manager will cost

The cost of having a professional manage your rental property is between seven and ten per cent of your total rental income each week. So, for a property with an average rental return of $550 per week, you would need to pay the agent between $38.50 and $55 per week, which amounts to between $2,002 and $2,860 per year. If you compare this to the time commitment and potential costs you could face if you were to represent yourself at the tribunal, this weekly management fee is marginal. 

5) Know the additional costs when buying a property

Along with the cost of your deposit, you need to account for the cost of building inspections, stamp duty, conveyancing fees and any legal costs.

You may like to take the opportunity to set up a trust in which to buy the property. This can give you some asset protection and capital gains tax treatment options, especially if you are looking to develop the site or sell and realise gains (such as a property ‘flip’).

6) Budget for investment property ongoing costs

As the owner of an investment property, you will need to ongoing costs. The typical ones will be to…

  • Pay council rates
  • Water rates (or tenant can pay)
  • Insurance
  • Body corporate fees (if in a unit, townhouse or apartment complex)
  • Land tax
  • Property management fees
  • Repairs and maintenance costs (such as lawnmowing, potentially)

The income you receive from the tenants in rent will help in covering some, or all of the ongoing costs of the investment property.

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