Is Buying An Investment Property The Right Strategy For Me?
An investment property can be an excellent asset and a wonderful start or addition to your property portfolio. However before you embark on purchasing your first investment property you need to establish that this is the right strategy for you. I recommend asking yourself the following questions:
- Do I have job security – can I afford to meet my mortgage re-payments?
- Am I in the top tax bracket? If so, there are tax benefits with a negatively geared property.
- Am I a low-income earner? If so, do I have sufficient funds to purchase a positively geared property?
- Will I want to purchase my primary residence in the next five years?
- If so, will the investment property hamper my ability to borrow funds?
- Will I have sufficient funds for the deposit on my primary home?
Note: In strong property markets, properties have historically appreciated in value and equity from one property was able to fund an additional property. However, in a subdued property market it is safer to not rely on short to medium term capital growth.
After establishing that an investment property is right, you then need to formulate your investment strategy. The guidelines below should provide a helpful outline to get started on your investing journey.
- Once you have established that an investment property is right for you, you need to determine the type of investment property that is right for you. That is whether you are seeking:
- Rental Yield = (Total Yearly Rent – Expenses) / Purchase Price x 100
- Capital Growth = Increase in the market value of your property over time
- Rental Yield & Capital Growth
1. RENTAL YIELD:
Apartments and houses provide very different rental yields, with Sydney houses in the inner-ring suburbs returning approximately 3% – 4% rental yields compared to one-bedroom apartments returning approximately 4%- 5% rental yield. As a general rule, suburbs that are further than 10km away from the CBD tend to provide higher rental yields due to their lower purchase prices.
Positively geared properties are properties where the rent exceeds the expenses. It is important to note that the net income generated from your investment property is taxable. Positively geared properties tend not to provide as much capital growth as negatively geared properties.
For example, there are $250,000 properties in Western Sydney that are providing rental yields of approximately 7%, which is excellent if you are seeking high rental yield. This would not be as beneficial for a high income earner as you would not be getting any negative gearing benefits and would solely be relying on capital growth.
Negatively geared properties are properties where the expenses such as the mortgage payments, maintenance and insurance are higher than the incoming rent and this amount is tax deductible. Negatively geared properties work particularly well for employees who are in the highest tax bracket as the loss from the property can be deducted from your taxable income.
2. CAPITAL GROWTH:
This is where you are relying on your property to increase in value over time. Historically, this has been an effective strategy, however in the current property market, it is risky to rely solely on capital growth, particularly when growth may not happen for ten years. However, this strategy works when you are buying a unique or an undervalued asset and are prepared to hold it for the long term.
3. RENTAL YIELD & CAPITAL GROWTH:
I recommend purchasing investment properties that provide a combination of rental yield and capital growth. I seek properties providing a rental yield of 5% in good locations (per the location criteria below) that will increase in value over time. Also refer to our Top Tips When Buying Investment Units article.
The factors that are important are:
- Within 10kms of Sydney CBD
- Close to public transportation
- Good infra-structure around it, i.e., grocery store / amenities / cafes / universities
- Close to beach or in an up-and-coming area that is becoming “hot”
- Less than 2.5% rental vacancy rates in the area ensure demand for your property
There are a lot of things to consider when purchasing an investment property and having a good team of professionals on your side is important. Here are some of the other factors you need to consider:
Depreciation – Use a quantity surveyor to determine depreciation you can claim on your investment property
Capital Gains Tax (CGT) – CGT is payable upon the sale of your investment property although not on the sale of your primary place of residence.
Finance – Interest-only loans are popular when purchasing investment property, particularly negatively geared property, as 100% of the payment is tax deductible. A good finance broker can assist you with the appropriate loan for your circumstances.
Research – Finding the right property in the right location at the right price takes a lot of research. Buyers agents perform multiple property inspections daily, know the suburbs and real estate agents and can take the hard work out of it for you.
Changes to the legislation now allow self-managed superfunds to invest directly in property. The fund is able to buy a property outright or borrow to purchase a property. The amount that can be borrowed depends on whether it is commercial or residential property and whether the trustee is an individual or a company, however it can be as much as 70%-80%. There are tax benefits with purchasing property through your superfund such as maximum 15% tax on rental income and reduced capital gains tax on any capital gain if property is sold after 12 months. Before embarking on this strategy, please find out more from your certified financial planner, accountant or the tax office. http://www.ato.gov.au/superfunds/
Disclaimer: This information is general in nature only and should not be relied on as financial or legal advice. Formal advice should be undertaken before acting on any of the information above.