Property Investment – What Can You Afford?
At the outset, it is important to work out the value of the property you can afford to purchase.
This will be driven by a combination of:
- How much equity can you contribute towards the purchase (either savings or equity you may have in an existing property)
- What you can afford from a cashflow perspective – that is; to cover proposed loan repayments, property maintenance & other associated costs, tenancy vacancies etc.
Property Investment – Do Your Research
Based on the growth achieved over the past few years, it may seem that all you need to do is buy a property to make money.
However, like any investment to avoid later regret, it is important to do your research to understand:
- The market/area you in which you are looking to buy
- How appealing is the area from an amenities, shopping, and transport perspective
- If there any plans for major infrastructure changes in the area that may affect values/demand?
- The demand for rentals in the area and what returns can be achieved?
- Your ideal tenants? Are they located in the area?
- The type of property will you purchase (house, townhouse, apartment)
- Whether it is best for you to manage the rental yourself, or engage an Agent
- The annual costs associated with owning an Investment Property
- If borrowing to fund the purchase, the requirements, and policies of Lenders
Borrowing to Purchase an Investment Property
How much you can borrow will be determined by:
- The type and location of the property
- Your ability to repay the proposed borrowing at current interest rates, plus a serviceability margin of 3%, over a maximum of 30 years
- The amount of equity you can contribute to the purchase (Depending on the property and the Lender’s policy, this can range from 40% for some apartments, to 20% for houses/townhouses in the metropolitan area)
- Whether you have additional sufficient funds to cover all the costs associated with the purchase. This includes Stamp Duty, legal/conveyancing fees, sworn valuations, building or inspection reports if required, loan setup costs
Tax Benefits of Property Investment
Apart from capital growth, one factor that attracts many people to property investment is the favourable tax treatment.
Generally, costs associated with owning the property can be offset against the rental received.
These costs may include:
- Interest & Lender Fees on borrowings associated with the property
- Fees Agents charge for managing the rental
- Repairs and maintenance
- Advertising for tenants
- Council Rates
- Land Tax
- Building depreciation
- Appliance deprecation
- Gardening – Property maintenance
Where the costs exceed the rental, this is known as negative gearing. The shortfall can usually then be claimed as a deduction against the property owner’s income.
Property Ownership – A Critical Decision
Before making an offer on an investment property, it is critical to speak to your accountant to understand the tax implications (& benefits) and importantly, in which name it should be purchased.
The ownership of the property will be driven by your personal circumstances and should be part of a longer-term wealth creation strategy.
It may be the ownership is in joint personal names, one parties’ name, or potentially, a Trust structure.
At The 500 Group we have assisted many clients obtain finance to create wealth through property investment.
Whilst property investment has proven to be extremely rewarding over the past decade, it is not without risk.
When investing in property, there are many factors that need to be considered, to avoid later regret.
Research, understanding what is involved, and the guidance of Professional Advisors are essential!
In my next post I will outline some of the common pitfalls that need to be considered.
If you would like to learn more about how The 500 Group can assist you finance an investment property purchase, don’t hesitate to get in touch.