Why should you acquire an investment property?
So, you want to buy real estate? As Australians, it’s part of the vision and a popular topic of conversation at dinner parties. According to research, the national property market in Australia is worth $6.7 trillion, much above our investments in stocks or superannuation.
With national home prices rising 41.8% over the last decade, it’s no surprise that property investment strategy of purchasing has become a desire for many Australians looking to profit from capital growth and the additional rental income that property management can provide.
CoreLogic projected in 2016 that there were 2.6 million investor-owned residences in Australia, totaling a stunning $1.37 trillion. That is greater than the combined GDP of Austria and Norway.
According to the Australian Prudential Regulation Authority, about 35% of residential loans taken out in Australia in September last year were for investment homes, a staggering proportion given that the UK buy-to-let mortgage sector accounts for only 14% of new lending.
What exactly is an investment property?
An investment property is any real estate acquired to generate a return (profit) on the investment. This might be through short-term rental revenue, long-term property sales, or both.
Is it possible to consider a second house as an investment property?
If you buy a second house and decide not to live in it, you may probably claim it as an investment property. It is an investment property if your objective is to generate a return on investment, either through rental return or selling of the home following an increase in house prices. When you choose to live in it, it no longer qualifies as an investment property, and you cannot claim capital gains on it.
How do you go about acquiring an investment property?
Purchasing an investment property is no different than buying a place of abode. Check the web and local real estate listings for the region you want to buy in, or talk to a listing agent about what’s available in the locations you’re interested in.
When it comes to gaining finance from your bank, there may be a distinction between buying an owner-occupied home and an investment property. Also, when it comes to investment loans, lenders seem to be more stringent with their criteria. Investors are often charged a higher interest rate on both principal and interest and interest-only loans.
Before you acquire an investment property, you should think about the location you’re buying in and the sort of property you’re buying to guarantee it will provide a strong rental return or yield – or both.
How much capital do you have to put down on a rental property?
A 5% deposit (or more, depending on the lender) is required for a first-time investor, plus additional funds for fees and expenditures such as stamp duty.
Investors who own one or two homes tend to take a 20% deposit from the equity in one of their current properties to use as a deposit on the next one.
This implies they won’t have to pay Lenders Mortgage Insurance (LMI). Lenders take out LMI to protect themselves in the event that the borrower fails on the loan. Lenders typically charge the borrower a one-time fee to cover this insurance if the loan amount exceeds 80% of the value of the mortgaged property.
Is it possible for you to live in your investment property?
If you live in your investment home, it ceases to be an investment property and becomes your primary residence. Even if you only do so for a short time, you must declare it to the tax office since any costs you incur on the property are no longer tax deductible.
Is a rental property tax deductible?
On an investment property, you can claim a variety of tax breaks, which are detailed below.
What may you claim for your rental property? According to the ATO, property investors can claim a variety of costs on their property, including:
Management and maintenance expenditures, such as:
- Recruiting new renters
- Fees and levies imposed by the body corporate
- Council fees
- Charges for water
- Land taxation
- Lawn care and gardening
- Pest management
- Insurance (building, contents, public liability) (building, contents, public liability)
- Fees and commissions for real estate agents
- Maintenance and repairs
- Legal fees, such as the cost of evicting a non-paying renter and the costs of filing a lawsuit for loss of rental income.
Interest costs, which include the interest paid on the loan you utilized to:
- Invest in a rental property.
- Get a depreciating asset for your rental home (for example, to purchase an air conditioner for the rental property)
- Make necessary repairs to the rental property (for example, roof repairs due to storm damage)
- Finance improvements on a rental property that you currently rent or want to rent out.
- Purchase land to construct a rental home.
Can I claim the cost of modifications to an investment property?
Property flippers are those who acquire houses with the express goal of renovating and reselling them. According to the ATO, if you do this, you may include your net profit or loss from the refurbishment in your income tax return, which is the profits from selling the property and other costs connected with buying, holding, renovating, and selling it.
You can even do this if you buy a house as an investment and decide to refurbish and sell it after a few years.
If you are deemed a property investor for tax purposes, any net gain or loss from property improvements is regarded as a capital gain or capital loss, accordingly.
What exactly is negative gearing?
Negative gearing occurs when the operating costs of your investment, including any interest paid, exceed the revenue generated by your investment. For example, if you charge your renter $500 per week in rent but pay $600 in mortgage payments, you’re losing $100 per week.
The net loss from negative gearing can be utilized as a tax benefit, making it an appealing choice for investors. You might also expect the property’s value to rise over time, canceling the rental revenue loss. If your home is positively geared (you earn more in rental income than repayments, for example), you will be taxed on that gain.
How much money can I borrow?
You may usually borrow up to 95% of the buying price as an investor. This implies you’ll need to put down 5% of the purchasing price. The less you borrow, the lesser risk you pose to the creditor, and the more probable it is that you will be approved.