Investing in residential property?
Australians love property especially residential property which offers Australians the security of ‘bricks and mortar’ compared to the fluctuating values of shares and commodities which is one of the reasons most banks will lend up to 95% of the value of a residential property compared to all other investment options.
You can invest in property in two ways – directly or indirectly. Both ways involve some complicated financial issues, and one of those is tax. You should do your best to minimise tax to get the most out of your investment.
Property investment explained
Direct property investment means you buy all or part of the property yourself. Property tends to increase in value over time, and, in the meantime, you can rent it out or live in it.
Indirect property investment means you don’t directly own the property, but you do get a share of the profits. You buy into a property fund or company and get dividends and/or capital growth when the fund makes a profit.
We will concentrate on direct property investment in residential homes which tend to be a stable and passive asset requiring very little management unlike other investment strategies, you can easily increase its value by adding assets such as air conditioners, car ports, or renovating, painting, new carpets or window coverings all of which can be depreciated by means of a quantity surveyors report.
Things You Must Know Before You Buy Rental Property
Evaluate risks and returns before you invest. Rental property can be a money pit if you don’t know what you are getting into, before you buy rental property, consider three things:
- The expected amount of rental income (the yield)
- The annual expenses you will incur
- And the financial risks involved
When searching for rental property find out how much rent is reasonable to expect given the location and quality of the property.
The annual expenses you will incur which may include; insurance, routine maintenance and repair items, and the cost of any property management services. Don’t forget to set aside funds for unexpected expenses such as replacing the hot water unit, air conditioner or pool filtration, electrical or plumbing.
There may be some risks that your property could sit empty between renters, lowering your overall return. You could incur legal expenses should you need to evict a bad tenant and costly repairs should a bad tenant cause damage to the property.
A qualified property management company will help reduce risks, as they have the experience necessary to find high quality tenants. Property management firms typically charge 10% of the rent received. Rental property can provide a stable source of income, but like any investment, you need to understand what you are getting into before you buy. It is always wise to discuss your intentions to an accountant who has experience in rental property investing.
Which property is best for you…Old or New
Not all investors have the same requirements. For instance, one investor may require a negatively geared situation where another requires instant cash flow or maximum capital gains or, if they’re really clever (or lucky,) a combination of all three.
Purchasing an older property as an investment for some investors may be an option, especially in the areas where new stock is not available or where second-hand stock may offer higher capital gains.
In general, old properties tend to be smaller in size and have fewer appointments. In some cases, they have polished floors in place of carpets, less lights, single bathroom and shower and no motorised garage door. They often have window curtains and ceiling fans to many of the rooms.
Old properties are often found close to the CBD with proximity to bus and train routes, which are popular with singles and young married couples with no children. They often offer high capital gains and, in some cases, require immediate maintenance.
More developers and builders are now opting for higher standards of inclusions, which often include costly European models. New properties have a distinct advantage in that the fittings are generally of a high standard — a prerequisite in today’s discerning property market. New properties are typically located in the outer developing suburbs and are popular with young families with children. However, capital gains in these more outlying developments may be weaker than in near-city areas, as capital growth is attributable to land value, not the added value of improvements. The greater emphasis on inner city living has led to stronger capital growth for near city suburbs.
Tax Depreciation Advantages
New property certainly provides the rental property depreciation, returning 48.32% of the purchase price over the life of the property compared with 38.15% for the second hand property and 7.81% for an old property, which was unable to claim building allowance due to the fact that it was outside the eligible timeframe set by the government pre 1985.
In summary, new properties generally have a distinct advantage over older properties in the areas of tax depreciation benefits, but (depending on location and circumstances) may not offer quite the same level of capital gains. Whether capital gains or tax depreciation benefits are of greater importance depends on the investor’s particular financial circumstances and goals.
Finding a tenant
The property owners want list;
- I want a tenant who pays on time.
- I want a tenant who takes care of my investment property.
- I want a tenant who is going to stay forever,
- I want a tenant who never calls with problems
- I don’t want any property management headaches.
Are they any ideal tenants and where are they or more importantly, how can we attract them? How do we tempt the tenant who will look after the property, the best way to answer this is research what the tenants are looking for.
- Good position.
- Large enough with storage and parking
- Clean and in good repair
- A landlord who will maintain the property
- Privacy, a fair rent and reasonable rent increases
- Long-term tenancy, which means a property that is not likely to be sold
- Honesty and integrity, what you say you will do, you will do
Unfortunately, there is no place where landlords can go to choose their tenants. They must attract them. Finding good tenants can be a difficult and costly exercise and it is therefore vital to understand the behaviour of potential tenants. The key to enticing many good tenants is in understanding how most tenants find rental properties.
Walk or drive past 30%
A recommendation 15%
Newspapers ads 10%
Although the percentages may vary, depending on the location and size of your property, they are a good indicator in understanding the methods of attracting tenants.
Stamping your personal taste.
It’s important to note that the professional property allowance specialists who provide a tax depreciation schedule on your investment property are analysing the purchased property for the purchase price at the date of settlement. If you find the need to renovate or remove some structures, then you’ve actually changed what you originally purchased, and this may cost you dearly in depreciation allowances. It pays to have your property analysed before committing to additional capital expenditure.
A final reminder – one should not purchase properties solely for the rental property depreciation. It’s amazing how many people forget this very basic rule. Capital gains and cash flow should be the main goals, as virtually any investment property will provide substantial tax depreciation benefits to its owner.
TIPS and TRICKS
- Speak with your local realty, check what is best
- Don’t purchase for the sake of depreciation
- Claim depreciation, get a Quantity Surveyors Report (tax depreciation report)
- Get your tax depreciation report done at settlement
- List it first, it must be available for rent
- Try not to stamp your personality, it’s a business
- Purchasing a new property and renting your old, protect your capital gains
- Get a good accountant familiar with investing in rental property depreciation
The Australian Tax Office (ATO) specifies that a qualified professional should prepare Tax Depreciation Schedules.
It is important to use a Tax Depreciation Professional who specialises in tax depreciation, due to the ongoing changes to the legislation regarding investment properties. By having a quantity surveyor prepare your tax depreciation schedule, you are maximising the amount of deductions from your investment and creating a much healthier cash flow.
Property Returns are the leading specialists in the preparation of Tax Depreciation Schedules and can provide you the investor with a tax depreciation report with a quick turnaround.