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What is a residential investment property?
A residential investment property is a house, townhouse, terrace or unit which the owner(s) does not use as a personal residence, but rather with the intention it be rented out to a tenant. This allows the investor(s) to benefit from both tax advantages and rental income from the property.
What is "negative gearing?"
If an investor borrows money to buy a property and the interest on the loan and costs of maintaining the property add up to more than the income earned from the property in rent, the investor can deduct the shortfall in interest repayments from his other income for tax purposes.
The principle behind negative gearing is that money paid towards interest on a loan and expenses incurred in maintaining the investment (e.g. rates, insurance etc.) is money spent to earn tax assessable income.
How easy will it be for me to find a tenant?
It has been our experience that, provided your property is located in a "high rental" demand area, you should have little problem finding a suitable tenant. This is particularly true of the lower end of the rental market where the rents are more affordable. Also with the right property management in place, vacancy should not be a problem. A good, experienced property manager should have no difficulty in finding regular and suitable tenants.
Don't more people want to buy their own property?
In 1978 approximately 73% of people owned the home they lived in, by 1988 that had dropped to 66%, by 2010 the percentage of people who own the home they live in is expected to be 49%. This means 51% of Australia's households will rent. The pool of people who have no choice but to rent is increasing.
Should the property be purchased in joint names?
Generally yes, but not always. An important consideration with this type of investment is its tax effectiveness. It may therefore be wiser (and more efficient) to have the investment owned by the highest taxpayer.
What if I need some money in a hurry?
Today more than ever, residential property offers a lot of flexibility for the investor. If for some reason you need money in a hurry, various banking institues have a variety of products that will allow you to actually draw the equity off your own home simply by re-financing.
If, in worse case scenario, your income stream is cut off for an unexpectedly extendend period of time and you have no other liquid asset base to turn to, then your investment property can be sold to pay back the loan.
What if interest rates increase?
If this is a concern to you, then you will have more peace of mind by taking out a loan which is fixed over a certain period of time (say 3 or 5 years). By doing this, it gives you two advantages:
- The amount of interest paid will remain constant for the duration of the fixed term, even if interest rates increase, and
- Because the amount of your repayment is known in advance, it is easier for you to plan ahead.
What if I don't feel comfortable about going into debt?
Because of our parents, family or well meaning friends we have been conditioned to fear debt and pay cash for everything. While there is some truth to this belief, it should not be taken as a blanket statement that all debt is bad and should therefore be avoided. Going into debt for consumables such as televisions and holidays, can destroy wealth - debt for assets such as investment property can build wealth.
There are two principles that will ensure your security when it comes to borrowing:
- Only borrow to purchase appreciating assets, and
- Make sure your debt is manageable.
Should I consider this a short or long term investment?
Experienced investors understand that time is part of the strategy. It takes patience and time to build real wealth and your thinking needs to expand beyond the time frame of one birthday to the next if you want to achieve real wealth.
What if I have a bad tenant that damages my property?
With the right property management, tenant difficulties should be reduced to a minimum. There are comprehensive insurance policies on the market that will protect your property against most forms of damage, these include:
- Default of rent
- Departure of tenant without notice
- Denial of access by tenant
- Breaking of lease
- Malicious damage by tenant Etc.
- Theft
- Legal liability
So by correctly insuring your property you are creating a safety net against any possible difficult tenants.
What if I don't have time to manage my own investment?
Maintaining control of your investment does not have to mean active involvement. Once a property has been purchased, your involvement can be reduced to a minimum through the use of an effective property manager.
The right kind of property management will save you time, money and headaches. Managers can assist you in some or all of the following areas:
- maintenance,
- tenant screening,
- rent collections,
- preparation of lease,
- inspection and
- tenant relationship.
It is important to look for someone who is not only a good manager, but also someone who runs the rent roll like he would his own business.
What if I don't have enough money for a deposit?
Cash deposits are not necessary when there are sufficient assets to borrow against (i.e. cross-collateralisation). For example, if you own your own home or have sufficient equity in it, the banks will allow you to use this as security for your investment property. So there is no need for you to "save up for a deposit". In fact, it can take you a long time to save for a deposit and by the time you have enough saved, property values may have increased.
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FAQs