By Courtney May
Are you interested in buying an investment property? Have you been looking for a while but still feeling hesitant? Have you been looking around at open houses or just brushing up your reading skills and delving into property books?
Less than 6% of Australians own an investment property and it can be an overwhelming process. We have put together some helpful tips below to assist you in determining if you are ready to step into the world of property investment.
Step One – Understand your finances
It is important to understand your current finances before embarking on any significant purchases. If you don’t already have a budget in place, we highly recommended creating one as it enables you to create a spending plan for your money. You are more easily able to identify where your money is going, what you are spending it on, and it also helps you plan ahead for expenses that you may incur down the track. A budget effectively helps you to manage and give you control over your money.
After completing your budget, you will be in a good position to see what ‘extra cash’ you have available to put towards a mortgage – to fund your investment. Although you may be looking to rent out your investment property, be sure that you can meet your obligations of any shortfall in your mortgage repayments that you don’t receive as rental income from your investment. It is also important to have a ‘plan B’ in place, including appropriate insurances such as income protection, life insurance etc.
Step Two – Finance Pre-approval
To ensure you feel confident when you start looking for a property to purchase, it is a great idea to apply for finance pre-approval with either a bank or a mortgage broker. This will enable you to feel confident in knowing whether you qualify for a loan, and if you do, you will then have a good indication of how much you can borrow for your investment property. Another advantage of obtaining pre-approval is that when you attend an open house, you can put forward an offer to purchase with much more confidence. Lastly, it also assists in the purchase process, as it can show a seller that you are more likely to purchase the house over another potential buyer who doesn’t have pre-approval in place.
Step Three – Property Research
With finance pre-approval under your belt, the fun of property research really begins! Now is a great time to start looking at properties within your price range. You should consider the location of where you want to buy and look at rental yields in these suburbs. Being in discussion with your real estate agent can help you keep informed of current market conditions. When you do find a property that you would like to purchase, it is important to consider the age and condition of the property also. Make sure you do your research of the current property market conditions as well as look at forecasts for future conditions. This will help you to stay informed, stay focused and understand the dynamics of the property market. You should also talk to your lender or accountant about the different types of mortgages available, negative gearing, the use of equity, etc.
Step Four – Investment Property Expenses
You are able to claim expenses incurred only for the period that your investment property was actually rented out. If this is the case you can claim a large number of expenses including interest expense on the loan, borrowing expenses, rates, cleaning, pest control, gardening, traveling to and from the property for inspections, agent commissions and many more. However you should be careful when it comes to claiming repairs and maintenance. A repair fixes defects including buying new parts for the kitchen or patching up a hole in the hallway but it does not mean reconstructing a whole part of the house such as the bathroom. In this case it would be classed as a capital improvement expenditure which is written off at either 2.5% or 4% per year over a period of 25 or 40 years respectively. Another thing to look out for is that when you purchase an investment property and you conduct initial repairs, this is also classed as a capital expenditure and therefore is treated in the same way as capital expenditure. Depreciation and capital works (on top of any capital improvements) can also be claimed on your investment property. Depending on the age of the property, it is definitely worth your while to get a quantity surveyors tax depreciation report prepared for your property. This allows you to maximise your depreciation and capital works deductions at tax time. It is important to understand what you can do to utilise and make the most of your tax deductions on your investment.
It’s easy to get overwhelmed about the thought of purchasing an investment property. In fact, due to there being so many aspects involved many people just push it to the side to think about later. Don’t give up. It is a massive decision to decide to enter the property market as an investor, but by following the above steps, you can better prepare yourself and feel more confident when you decide it’s time to invest.