Looking to invest in property?
First things first: many people who buy second homes will tell you they cost much more than expected. Maintenance, insurance, taxes and unplanned vacancies are just some of the costs you’ll encounter.
So the key is upfront planning on costs, clear thinking about what you want to buy and where, and patience while you’re shopping around.
The following tips will help you make the best possible investment decision for you and your family.
Talk to your accountant about… negative gearing
If you’re borrowing to invest, chances are you’ll take advantage of negative gearing. You are negatively geared when the interest you pay on your mortgage is more than the rent you receive. Your cash flow is negative, hence negative gearing. That amount of negative cash flow is treated as a loss, so you can claim it as a tax deduction.
… and tax
You will have to pay tax on your investment property, which means an annual tax return. Most repairs and maintenance costs are tax deductible, but capital improvements aren’t. For example, fixing a leaking water pipe is tax deductible, but adding to the value of the property by renovating the bathroom isn’t.
Also, different cities and suburbs will impose different levels of rates, depending on property values and services provided.
… and depreciation
Depreciation is a method used by accountants and the Australian Tax Office to spread the cost of an asset over several years. The amount you depreciate in a given year counts as a tax deduction for that year.
Assets like furniture and appliances can be depreciated over several years. Fittings and fixtures typically depreciate over five years. New buildings are depreciable over 40 years; it is sometimes possible to claim 2.5% of the value of the building as a tax deduction every year during that period.
… and insurance
Lenders will insist on hazard insurance for your property. Unfortunately, insurance rates are usually higher on second homes. You might also like to consider liability insurance, to cover accidents on the property.
Choosing between house and apartment
In the past, house values have risen faster than apartment prices. However, this is changing as more people choose apartment living. In the case of renters, three out of four prefer apartments.
Location, location, location
If you buy in a sought-after location with easy access to the CBD, you’ll find it much easier to attract tenants. Also, the inner suburbs of major cities have historically grown in value much faster than the outer suburbs.
If you’re buying in the inner suburbs, look for leafy streets, low crime rates, attractive houses and well-established parks. Infrastructure is also important. Consider roads, public transport, schools and hospitals, and try to determine if the area is gentrifying.
What tenants want – and don’t want
Prospective tenants can be picky; they want to be close to everything but not too close. Easy access to a freeway? Great. Right next to the freeway? No thanks. A nearby school for the kids? Sure. Across the road? Umm… might be too loud at lunchtime. They’ll want to be near public transport, without having late-night buses stop underneath their bedroom window.
As a general rule, parks are popular, pollution isn’t. Lots to think about when shopping for that ideal property!
