At the very top of many people’s New Year’s resolutions is to buy a property. But with the growth of property values slowing it’s more important than ever to first consider the tax implications, the location of the property, the surrounding landmarks and the investment property home loans on offer before buying your first investment property in Sydney. All of these aspects will decide whether or not you are making a valuable investment.
Mint Equity’s guide to buying your first investment property
Choose the right property, at the right price
Unlike buying shares (where the value of a company is fairly transparent) investing in real estate is more complex to price correctly. But with a little research, knowledge and patience the risks can be mitigated. A good mortgage broker will be able to provide property reports and insights into suburbs that might be flagged as high risk and difficult to secure finance for. They will also be able to look at your budget and perform a cost analysis on the property to see if your returns are going to cover your mortgage. At this stage you’ll know if the property will be impacted by negative gearing (where your costs are above your returns).
Do the sums
Property investment is a medium to long-term type of investment so it’s important to ensure you can afford to maintain the mortgage repayments and property before you sign on that contract. Once you own an investment property it can be relatively inexpensive to service the home loan and keep it since you’ll be collecting rent and receive many tax deductions on the expenses involved with owning the property. You’ll need to find a good accountant or financial planner to determine the tax deductions possible, the possible rental yield you could achieve and so much more so you can crunch the numbers correctly.
Engage a great property manager
A great property manager can be worth their weight in gold – their job is to keep things in order for both landlord and tenant. They will provide ongoing advice (property law, your rights and responsibilities as a landlord and those of your tenants), manage tenants, get you the best possible value from your property and even let you know when you should review the rent.
Your property manager will take care of any maintenance issues, help you find the right tenant, undertake reference checks and ensure the rent is paid on time. The cost of engaging a property manager is typically a percentage of the rent, is deducted from the rent received and is tax deductible.
Research the market and know the area where you are buying
Consider the other properties available in the immediate area and talk to as many locals and real estate agents as you can. They’ll let you know all the secrets to the best (and worst) properties in the area. Make sure you do the leg work and consult professionals you can trust. You can also take advantage of independent information from sources such as RP Data, Domain.com.au, the local council and even the Australian Bureau of Statistics (ABS).
Talk to your mortgage broker and get the right type of mortgage
There are so many options when it comes to financing your investment property, so get sound advice in this area as it can make a massive difference to your financial future. Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a trusted mortgage broker.
Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rate loan at the right time can really pay off.
Most investors set up the loans initially as Interest Only (rather than Principal and Interest) to maximise their cash-flow and reduce non-deductible debt (ie; the loan against their home, which they live in) but make sure you try and factor in flexibility. The reason Interest Only loans work well for investment properties, is that cash-flow and tax deductibility is maximised whereas with a Principal and Interest loan, your negative gearing benefit reduces as you pay down the amount of your loan. You may also want to seriously consider an investment loan that gives you the opportunity of paying interest in advance or has an Offset Account.
Read our ‘What does a mortgage broker do’ article to learn more
Utilise the equity from another property
Leveraging equity in your home can be an effective way to buy an investment property. Equity can be calculated by working out the difference between what your property is worth and what you owe on the mortgage. For example, if your home is currently worth $750,000, and you have $250,000 remaining to pay off on the mortgage, you have $500,000 worth of equity (of which you could access $350,000 which would take you up to 80% of the $750,000 value). Also, using the equity in your existing home can allow you to borrow more money against your investment property, up to 100% as an example.
Understand how negative gearing works
Negative gearing can offer property investors certain tax benefits if the cost of the investments exceeds income it produces. Australian law allows you to deduct your borrowing and maintenance costs for a property from your total income. However, you can only get a tax benefit if you earn other taxable income in the first place. So, while you are actually making a loss on the property, the advantage is that the loss can be used to reduce the amount if tax on your other earnings. However don’t buy an investment property just to get a tax deduction. Seek professional advice to see if negative gearing is the right avenue for your circumstances.
Investigate the age and condition of the property and facilities
The need to repair or replace the roof within the first few months of ownership could make significant difference to your profit and really pull havoc with your cash flow.
Always engage a professional building inspector and/or a strata report before you purchase to complete a thorough inspection of the age and condition of the property and to highlight any potential problems. Only use qualified and insured tradespeople to handle any repairs, maintenance and renovations.
It’s not always a bad thing to buy a property that is not in optimum condition because you get the opportunity to improve the value of the property by fixing the place up and this can increase your returns for both capital growth and rental income.
Ensure the property is attractive to tenants
Go for neutral tones and keep the kitchen and bathroom in good condition and you’ll find that you will attract better quality tenants. To find out more about what tenants are really looking for in a rental property read our blog ‘The important features tenants want’
Create a long term outlook and limit risk
As a long term investment you should be focused on committing to the property over a long period of time and building up equity so that you can potentially purchase another investment property and expand your portfolio. Financial security is important to try not to get too greedy – limit your risk and work towards a balance between enjoying life and financial stability.