"Australians used to
dream of a quarter-acre block to call home. Today, those in the know are making
money by buying an investment property rather than a place of their own."
"You don't have to be wealthy to have an investment
property, but you do need to do your homework and apply your finances
wisely," says Vicki Hood, product manager of residential investment loans
at ANZ bank.
So let's consider some
frequently asked questions:
Why should I buy an investment
property?
"People invest in property because
it's tangible and offers good returns," Hood says. "Property is easier
for some people to invest in than shares, because you can see it and feel it. If
you already own a home, you know what was involved in buying it, so it won't
require a quantum leap to commit to an investment property." Rental returns
and negative gearing will also help pay off your loan.
What should I look for?
The best thing to do is put yourself in the
renters' shoes. Proximity to transport, the number of bedrooms and the
availability of off-street parking are important. And if you wouldn't pay rent
for a place with mission-brown carpet, chances are potential renters won't
either.
How do I finance the loan?
Real estate agents generally require a 10 per cent deposit to
confirm your offer on a property. The amount of deposit the bank requires will
depend on your financial situation. In some circumstances, banks and other
financial institutions may lend up to 95 per cent. Talk to a few banks and
mortgage brokers and explore fixed or variable-interest-rate options.
Is it easier if I already own a property?
There's a growing trend for young people to buy a
home or apartment to live in, pay off part of the loan and borrow against their
equity to finance the deposit on an investment property. Equity is the
proportion of the house you own. "The bank can finance 110 per cent of the
investment property, using the home as top-up security," Vicki says.
"Depending on its value, you'll need to own roughly half of your current
property to get the 110 per cent."
What does negative gearing mean?
Negative gearing comes into play when you borrow
money to buy an investment, but the expenses are greater than the income it
generates. If rates, bank fees, insurance and interest on the loan for your
investment property add up to more than the rental income, you should be able to
claim the difference as a tax deduction. For example, if your expenses for the
year amount to $12,000 but you only receive $10,000 in rent, your $2000 loss can
be claimed as a deduction. It's always best to run through the details with an
accountant or tax adviser.
Are there any hidden catches?
While many buyers of investment properties have
little trouble getting a loan, they often forget to factor in extra costs such
as bank fees and mortgage insurance, which can add another $10,000 to the amount
borrowed. You should research the extra costs and calculate how much you'll have
to spend on the property each week. Ask the real estate agent what the rates on
the property are, and don't forget there may be periods when the property's not
rented.
How do I know how much rent to charge?
"As a general rule you should expect to get
between five and six per cent of the property's capital value back every
year," says Steven Leech from McGrath Partner Estate Agents. So if the
property is worth $220,000 you would hope to receive at least $11,000 a year,
which is roughly $210 a week. "It all depends on demand and how many other
similar properties are on the market for the same price," Steven says.
Check out your local newspaper to get an idea of the going rate.
I don't understand capital gains tax.
The profit obtained when selling an asset is
subject to capital gains tax. Some items, such as your primary residence or
motor vehicle, are exempt. But when you sell an investment property, if its
value has gone up, you'll have to pay capital gains tax on the difference. The
amount will be added to your regular income and you'll be taxed at your marginal
tax rate.
