Why invest in a new house, as opposed to an older one?
Newly-built houses typically provide a number of advantages over comparable existing houses:
New houses receive the full depreciation allowance on building costs and fixtures and fittings from the Australian Taxation Office.
New properties are desirable amongst tenants and will achieve a rental premium over a comparable older house.
New properties can be landscaped to a low-maintenance standard while older properties may have large gardens requiring ongoing maintenance.
New properties are unlikely to require any maintenance in the short to medium term, while older properties may require (potentially expensive) work throughout the investment timeframe – and these costs may be unknown at the time of purchase.
New properties can be built to a contemporary, high quality standard.
New properties can be designed in a way that appeals to tenant markets (for example, by including low maintenance gardens, open and internal adaptable spaces, adequate storage and security), whereas existing properties may need to be adapted.
Investor Assist generally recommends avoiding older properties as investments, unless the property is suitable for a complete refurbishment or subdivision (this may not be appropriate for everyone as there are additional risks involved), or is unique in terms of location or architecture.
What is better: high yield or high capital growth?
It is rare to find a property that delivers both high rental yield and high capital growth, as they generally have an inverse relationship, which means high yield may be achieved at the expense of capital growth, and vice versa.
High yields from cash-flow positive properties may be tempting in the short term, particularly when interest rates are rising. However, it is generally accepted that capital growth should be the primary objective of property investment as this is where the major gains are made – even if it means having a shortfall between your rental income and your loan costs.
What if negative gearing is abolished?
In the 1980’s negative gearing was abolished, and then reinstated only 18 months later due to the impact of rents and unemployment in the building industry. While this topic occasionally appears in the media, it is unlikely that this would occur again. Recent Australian governments have supported negative gearing for it encourages private enterprise to provide low-cost housing.
In any case, it is accepted that tax should not be the only reason for an investment. Tax certainly impacts the overall performance of property investment, and the ability to deduct certain expenses can increase overall performance. However, property has historically produced a sound rate of return in its own right (i.e. before tax is considered), and so would likely remain a good long-term investment even if tax benefits were reduced.
What if interest rates rise?
Resolve Finance believe it is a good idea to plan for potential rate increases as part of your overall investment finance strategy, and our finance professionals will ensure you have an adequate buffer in place. Interest rate rises are a tool used by the government to control inflation, and so in times of economic growth, rate rises are a reality. If rate rises are stressful, you may have the option of a fixed rate loan, which will lock your rate from anywhere between one and five years. Also consider that rents typically rise over time, providing added cash flow as your property investment matures.
What if I lose my job?
Losing your job is a genuine risk that should be considered when formulating you investment strategy, along with the resulting implications on property ownership. As part of our process, our consultants will cover a range of risks, “what if” scenarios and the importance of financial buffers to check your level of tolerance should the unexpected occur. People concerned about the security of their job may also wish to consider income protection insurance.
What if I don’t have a deposit for an investment property?
Our sister company Resolve Finance recommend that in this situation, there are a range of strategies that you may be able to take advantage of if you are in this situation.
If you have an existing owner-occupied home, you may be able to utilise equity in that property to fund your borrowing costs, therefore eliminating the need for a deposit. If you do not already own a home, low documentation loans may provide added flexibility to a standard bank loan. Other options include a family guarantee (where equity from a family member’s home is used as security), or a purchase in joint venture (such as tenants in common structure).
Of course, it is important to thoroughly understand all of the implications of these strategies, and our consultants can explain the advantages and disadvantages of each. Resolve Finance can also provide you with generic legal structures or questions you may wish to ask your personal legal advisor.
What happens to property prices when inflation is low?
Capital growth and inflation tend to be linked (although this is not always the case). Rises in inflation tend to bring about corresponding rises in property prices, and vice versa. Research shows that property tends to appreciate between 2% and 4% above the rate of inflation.
When assessing the impact of inflation it is important to view its relationship with capital growth in context, and understand the implication of “real” returns. The benefit of capital growth is increasing overall purchasing power by having it consistently rise faster than inflation. Inflation is an investment risk in that, if your investment maintains the same value but inflation rises, your purchasing power has actually diminished.
So while low inflation may bring about lower property prices, as long as capital growth remains above inflation, investors are still relatively well off in a “real” sense. There are documented cases of property prices increasing in terms of market value, but well below inflation. In the end, investors were far worse off in terms of “real” returns. The opposite has also occurred – where there has been low inflation and significant price increases (resulting in even higher real returns). These instances are unusual, but highlight the fact that capital growth doesn’t always follow inflation. But where growth is consistently above inflation (no matter what the actual inflation rate is), investors should be satisfied.
Should I choose a principal & interest or interest-only loan for my investment?
Our sister company, Resolve Finance explain that an interest only loan is one where you only make repayments on the interest charged, and not the principal (i.e. the purchase amount).
An accepted rule with regard to finance is that owner-occupied debt (for example, your family home) should be structured as principal and interest, while tax deductible debt (such as an investment property) should be set up as interest only.
Interest payments on an owner-occupied home are not tax deductible. Without the benefit of tax deductions, it is important to pay off the principal (i.e. the borrowed amount) as quickly as possible, to minimise interest payments. This may include making additional payments.
On the other hand, interest payments on an investment property are tax deductible (and extra payments towards the principal are not). Therefore, making payments towards the principal would reduce your disposable income with no extra taxation benefit.
Setting up an investment loan as interest only can maximise after-tax benefits, and with smaller repayments (since they are only for the interest portion of the loan), the extra money can be put towards property expenses or other investments.
In addition, long-term capital growth, and not property ownership, should be the major aim for property investors. Your goal should be to pay off the principal when you sell a property, and have money left over from capital gain.
Is there a good or bad time to invest in property?
With the benefit of hindsight we are able to identify times when it would have been either a “bad” or “good” time to purchase property. Even in recent history there are examples of prices rising and falling in a relatively short period of time.
However, long-term investors concern themselves less with short-term price movements, and more with long term capital growth. This is because occasional price drops are part and parcel of long term investing. Importantly however, history shows that over the long term, these same assets tend to reward investors with the highest returns.
It is also important to note that property prices do not move in a straight line. Prices tend to move in line with the property cycle, although the timing of the cycle is inherently difficult to predict. This is another reason why trying to predict the best time to buy is much less important than buying a good value property with the intention of holding it for the long term – preferably for a minimum of five to seven years.
If I invest in real estate, how deeply involved do I need to be?
It is your choice to be as involved as you want to be. However, one of the benefits of Investor Assist’s service is that we take the hard work out of your hands.
Many people venturing into property investment for the first time discover how hard it can be to find good value investments, and how time consuming it can be. Rather than be distracted by the process, by utilising the services of Investor Assist you will have access to straight-forward and tailored strategies to help you make informed and confident decisions.
I am unable to get a loan to purchase an investment property from my bank – what are my options?
If you have not qualified for a loan from your bank, there may be other options available to you, and the exact strategy will depend on your situation.
Under the Alcock Brown-Neaves Group sit the services of two experienced finance companies that have a history of providing genuine alternatives to the big banks. These providers are often able to take a more flexible approach to finance than banks, are adept at helping investors make the most of their current situation, government assistance, and valuable debt reduction strategies – all of which can help you get your foot in the property door.
Resolve Finance was established in 1997 and has a wealth of experience. Resolve holds an Australian Credit License with the Australian Securities and Investments Commission. The company is well respected in the industry and achieved 8th place in the Advisory’s top 25 brokerages of Australia.
Bluebay Finance was established in 2008 to offer clients an alternative to the big banks. The mortgage manager aims to help Australians into new homes by providing innovative solutions.
I already own a negatively geared investment property that has not performed very well. Should I sell it?
If your property has not performed to expectation, it is understandable that you may consider selling. However, note that by selling, you are locking in this result permanently, and removing the potential to benefit from any future capital gains.
You may wish to speak with a financial specialist about the potential benefits of restructuring your finance with a view to improving your cash flow or making other long term investments. Resolve Finance has experience at improving the overall position of investors in this way.
How long should I invest in property for?
Property should be considered a long-term investment. Investor Assist considers a minimum of five years, and preferably seven to ten, to be a suitable timeframe for investing in property, for the following reasons:
- Buying an investment property involves substantial upfront, ongoing and exit costs. Therefore in order to make a profit, the value of an investment property needs to grow by more than the value of these costs, and the after-tax costs associated with holding onto the property. This can take time
- Most investors target capital growth from their property investments, yet it can take time for a property to increase in value. You may also need to endure occasional years of low or even negative growth throughout the course of your investment.
There may be other factors that influence how long you invest for – including your tax situation and your age until retirement. A professional advisor can assist with advice in regard to these issues.
How has the location of Investor Assist’s properties been selected?
Investor Assist seeks land value when considering the merits of various investment opportunities – either good current value, or locations that will likely experience sound growth in the future. Land value is a driver of capital growth in property, and it can vary widely between suburbs. It all comes down to supply and demand – as long as demand exceeds supply, opportunity for capital growth exists.
The things that tend to influence capital growth include:
- Scarcity of land in the area (i.e. how built up is the suburb, and how much new land will be available in the future)
- The proximity to infrastructure, amenities and attractions such as schools, the CBD, the ocean or river and shops
- Convenience to transport options, including public routes and ease of access to major built up areas.
How does property compare to shares as an investment?
Research tends to show that property and shares have performed similarly over a long period of time. However, shares and property are very different types of investments, and their performance is impacted by different factors. Importantly, the overall value of an investment will be different for different people depending on their financial situation, and so comparisons can be difficult.
One major advantage that property has over shares as an investment is the ability to leverage a significant amount of a property’s value. Banks will typically lend more to someone investing in property than in shares – up to 90% of the value of a property (with mortgage insurance). And if you already own your own home, and have a reasonable amount of equity in it, you may not even need a deposit.
How can I maximise rental return from my property?
It is recognised that renters live to suit their lifestyle, while owner-occupiers tend to live where they can afford. A number of factors will add a premium to rental yield, including the following:
- Convenience to public transport and major built up areas (e.g. CBD)?
- Proximity to amenities and attractions such as shops, the beach, the river or sought-after schools
- Quality and facilities of the property (including storage, security, entertaining areas).
How can I be certain that property prices will go up?
Unfortunately, no one can be certain that any type of investment will go up. However research shows that property prices have increased over a long period of time. And while history is no guarantee, underlying factors (such as Australia’s ongoing population growth, expansion of industry and a housing shortage) support the notion of continued price gains in future.
House vs. apartments - what should I invest in?
There are a number of advantages and disadvantages to either houses or apartments, and the decision will likely come down to your personal situation.
Apartments tend to occupy the high-yield category of investment, since the ratio of rent to value is typically higher than that achieved for houses. This may be ideal for investors who require a high level of cash flow to supplement their loan repayments. Apartments meet a growing demand for accommodation in built-up areas, and generally also require less ongoing maintenance. However, apartments are subject to body corporate fees, which must be considered when calculating overall investment merit.
Houses have the element of land that apartments lack. And while apartments in sought-after areas, or areas that are completely built up, may still achieve sound capital growth, Investor Assist believes the element of land is a vital point of difference. This is because land can increase in value when it is scarce, yet scarcity is usually not a driver of value for apartments, since there is the possibility that new apartment buildings may be established in nearby locations. Houses can also be modified or improved relatively easily – this may be more difficult in apartments.
Could I benefit from different ownership structures?
How you structure the ownership of your properties may have a large bearing on their future profitability, particularly in an after-tax sense. It also has relevance with regard to estate planning and asset protection.
The ownership choices include personal, self-managed super fund, company and trust (either family or unit). Each has its own advantages and disadvantages, and if you own more than one property, there may not be one structure that works best for all.
A professional advisor will be able to determine what ownership structures are best for your situation, depending on a range of factors relating to your financial situation and stage of life.
Are there any tax benefits to investing in property before the end of the financial year?
Yes, absolutely; you can time the purchase to maximise your taxation outcomes. By investing before June 30, you can bring forward a host of taxation benefits and achieve a short-term cash flow boost to help out with the up-front costs. Our tips are:
- Know your deductions and claim immediately on a host of property management costs potentially worth thousands of dollars of tax deductible expenses
- Pre-pay interest on your investment loan to bring forward deductions that you would otherwise have to wait for until next year
- For the ultimate in efficient property investing at tax time, focus on new properties (either house and land, or a completed spec / display homes) which receive full depreciation allowance on buildings and fixtures and fittings costs
- If it’s tax effectiveness you want, then buying with a self-managed super fund may be for you
They are easy to set up and can bring considerable tax-related advantages, not to mention more direct control over your super compared to a traditional retail fund. Want to ask a question – drop our Advisory Panel Team Member, Don Crellin from Resolve Finance an email firstname.lastname@example.org
DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.