How do I pick the best area for an investment property? Return to top of Page
In recent years, the Housing Industry of Australia (HIA) has claimed Australia is going to have a shortfall of 500,000 houses by 2020. More than 30% of the population rent their place of residence, and this percentage has continued to increase over the past 10 years. These statistics indicate that as new properties come onto the market there will always be a pool of tenants looking for quality rental accommodation.
Supply and demand in rental properties is cyclical and vacancies can and do occur from time to time. The key to picking the best area for an investment property is to ensure you generate ongoing rental income and that your property increases in value over time. In turn this means you need to minimise vacancies and are able to select good quality tenants who are happy to pay an increased rent over time. To achieve these outcomes you need to choose the right property in the first place. Properties that are well-located, well-maintained and that have reasonable rents attract more tenants.
Key factors to consider when you are buying an investment property include:
- proximity to shops and services, including doctors and supermarkets
- close to schools and tertiary education institutions
- ease of maintaining the property, including how new the property is and whether you have extended equipment and appliance warranties
- access to public transport and major arterial roads
- number of bathrooms and dining areas
- competition from other properties in the local market
- employment growth and employment opportunities in the area or region in which the property is located
- historical price trends for similar properties in the area
- historical rent trends for similar properties in the area
Why choose property over shares? Return to top of Page
In answering the question ‘Why choose property versus shares?’ you need to consider the following matters;
- your personal preference
- what is an acceptable risk and what is your desired return
- how much money you want to invest
- the tax effectiveness of the investment
Both shares and property can be invested in easily and whilst they are two very different products, both can provide the same tax benefits.
In the 10 years prior to the Global Financial Crisis (GFC), many Financial Planners promoted the view that shares had been a better investment than Property. However, since the onset of the GFC and the massive plummet in share prices, where many shares lost more than 50% of their book value, few people would argue that shares present a safer and more secure investment than property.
When buying investment property, there are some important things to remember given property is less liquid than shares:
- select the right investment property in which you are comfortable to invest;
- choose properties that deliver you a positive cash flow in a short period of time;
- structure your finance to improve your investment returns; and
- maximise the tax effectiveness of your investment property.
Are units better than houses for an investment property? Return to top of Page
There is no simple ‘Yes’ or ‘No’ answer to this question. Many factors need to be considered as well as your personal preferences. Houses may experience better capital growth because of the higher land content.
However, maintenance costs may be higher due to outdoor areas that need to be maintained and the yield (total income/price of the property) could be lower. In some locations the overall returns from units can be the same as for houses and is sometimes higher. Also, the different tenant profile in some locations (e.g. university students vs young families vs construction workers) predetermines the suitability of houses, units, townhouses or apartments. Near the city centre, apartments and townhouses may suit young professional couples whereas in the suburbs, young families might be more attracted to houses.
How do I maximise the tax benefits from investing in property? Return to top of Page
The best way to maximize the tax benefits from investing in property is to buy new properties. New properties provide investors with the maximum possible depreciation allowance and capital allowance, enabling investors to claim the largest possible tax deductions.
Properties bought under the National Rental Affordability Scheme (NRAS) enable even greater tax benefits, due to the $10,917 annual tax credit that is passed on by the government to the investor each year for 10 years. NRAS is without doubt one of the most tax effective ways for people to invest in property in Australia.
For most taxpayers and investors with 100% borrowing, investing in a new standard investment property with current rental and interest rate levels will result in negative cash-flow. However, with the two income streams emanating from a typical NRAS property (rent and the NRAS Incentive) and 95% borrowing on a property under $350,000, the cash-flow is likely to neutral or positive in the 1st or 2nd year of owning the NRAS property. The tax benefits are even more positive for high income earners.
*Note: The tax benefits for investing in property differ based on individual tax circumstances and the entity or structure in which a property is purchased.
What is negative gearing and is it here to stay? Return to top of Page
Negative gearing is where an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. The investor can reduce the tax liability on other assessable income by the amount of the investment property’s loss. The investor must fund the shortfall until the asset is sold, at which point a profit is made if the capital gain on the asset exceeds the accumulated loss.
The beauty of borrowing, or gearing, to invest is that it enables you to go into investments that might otherwise be closed to you, whether it’s property or shares. Most people accept a loss in income because they believe it will be more than compensated for by a capital gain down the track.
To learn more about negative gearing and how it might work for your next investment property purchase, please contact our office today for a FREE NEGATIVE GEARING INVESTMENT ANALYSIS.