Investment Property Tips & Guides
Investment Property Tips & Guides
Taking out investment loans for investing in property makes a lot of sense, as besides creating a regular income through rent you can most often obtain capital growth not to mention generous taxation benefits.
Many people look on their home as being a property investment – and this is true – but there are still many people who prefer to rent in an area they can’t afford to buy in but buy an investment property in an area they can afford and rent it out as investment loans are as flexible as home loans.
Taking out investment loans for this purpose has many advantages in that you can have the best from both worlds because through an investment property you can earn money through:
- capital growth.
- rent.
- taxation incentives.
Investment Property – Capital growth.
Capital growth simply means that your property value increases as the years go by. You may experience a drop in property values during part of this journey but if you wait it out you will find that prices will continue to rise again in the longer term.
In looking at your investment property from a capital growth point of view you should look at it in decade long periods.
House prices in Australia average around 9 percent over the longer term, taking into account the highs and the lows. For instance in 2003 residential house prices rose by 20% throughout Australia but since that time have slowed somewhat and have even dropped back in some areas.
It is therefore prudent to take a long term view of capital growth when considering the worth of your property investment through your choice of taking out an investment loan.
Tips to maximize your capital growth potential can include the following:
- Purchase the right investment property (residential or commercial)
- Make sure it is in the right area (where there is demand)
- Ensure you can get it at the right price (make sure you are getting value for money).
To enable you to do this with confidence and a certain knowledge make sure that you:
- Study house and property sales.
- Keep an eye on auction results and newspaper advertising.
- Chat to estate agents constantly to get a feeling on what is happening as regard to price movements. It might be wise to consider buying when prices are falling in a certain area if you can be assured that in the longer term things will improve.
Investment Property – Rent.
When contemplating the rental potential of your property you can carry out a simple calculation known as the properties yield potential.
This is done by dividing the annual rent by the price you purchased the property at and multiplying the result by 100. This will give you a percentage result.
Examples:
- You would like to purchase a property valued at $400,000. You know you can rent it for $18,200 annually ($350 a week). This gives you a yield of 4.5%.
- You are also weighing up buying a small cottage in a remote mining town where rental demand is high and property prices are low.
- You know you can purchase the property for $350,000 and the estate agent tells you he is getting up to $600 a week rent for similar properties in the town. Do your sums and you will find you will get a comfortable yield of 9 %.
The important aspect of this is that your yield figure will fall as the value of the house rises if you can’t increase rent.
Investment Property – Taxation incentives.
We have all heard about negative gearing and all investors in property should make themselves full aware of its implications as this is where investment loans become particularly attractive. Especially if you belong to the higher income bracket.
Negative gearing. It is a system where you are encouraged to invest:
- It occurs when the costs involved with the investment are higher than the return you can expect to achieve from your investment.
- It is particularly effective when the rental income from the property is less that the interest on the investment loan taken out to purchase the property plus maintenance costs and property management expenses.
- It means you can deduct the expense of property ownership from your income thereby reducing you taxation obligations.
- Negative gearing means that while you are making a loss on your investment property and lowering your overall taxation level, your property is still attracting capital gains therefore making the investment worthwhile.
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