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Finance for Property Investment

APO Finance specialise in the best finance strategy for property investing, as well as having some of the best property investment opportunities currently available in the market place.  Our expert consultants can assist you in helping you get the best loan deal as well as structuring your loans for the long term growth of your property portfolio.

Property Investing Guide

The most popular form of investment in property amongst Australians has clearly been residential property - flats, townhouses and houses.  It's one of several property investment alternatives.  Others include offices, commercial property (like factories) and retail property. Investors who can't afford to buy their own office block can also choose from various property trusts which invest on behalf of many people. Several of these trusts are available to investors through the Australian Stock Exchange which all have different financial profiles.

Different sorts of property often produce similar returns.  But while most prospective property investors have undertaken their own home financing and can transfer this experience to similar housing, it is unwise to believe that other property investments have similar characteristics.  If you are venturing outside housing for the first time for investment purposes, make sure that you understand the details of the new market and obtain expert advice if necessary.

Property management

Most Australians handle their property management through a real estate office.  Some real estate offices provide an excellent service by marketing for tenants, arranging for rent to be collected, fixing minor repairs and providing a useful summary for tax purposes at the end of the year – but be warned, the bigger the rent roll the lesser generally your property and needs are catered for.

Your Community Realty is an agency where getting to know you and your needs is paramount. You can be assured that you will not be a number in the system, as many landlords feel when talking to their manager.

Your Community Realty is one of the only property managers who have a catchment across Brisbane and the gold coast, meaning that investors can use the one manager across varying locations, which makes managing your investments simpler and easier. Specialising in new homes, they understand the maintenance and warranty issues particularly in the first 6 months and will do all the liaison with your builder on your behalf to address any issues, saving you time and emotional energy.

Initial costs

• Stamp duty - this will usually be the biggest additional cost of acquiring a property - often up to six per cent. Remember to allow for this expense when determining how much you can afford.
• Stamp Duty is a capital cost and is added to the cost base of the property.
  Legal/conveyancing fees. These are normally deductible if the property is for investment purposes.

On-going costs

Property as an investment has many benefits, and generally it will incur costs to run.  When calculating the return (and do make sure that you calculate it), ensure that you allow for the following charges:

• Interest costs on the borrowings.
• Insurance (be aware that items you provide such as drapes, carpets, appliances are contents and will need to be insured).
• Rates. Most residential tenancies do not allow for the payment of rates and other government taxes; therefore they need to be paid by the property owner. (This usually does not apply to other forms of property investments.)
• Repairs. Be realistic. Things do go wrong and need to be repaired or replaced. Maintenance items are usually tax deductible - but be aware that property improvements are deemed to be capital expenditure and are added to the cost base of your property and are, therefore, not fully tax deductible. New Homes purchased for investment counteract this issue.
• Body corporate. These fees are payable in most unit and apartment complexes. The level of these fees can sometimes be quite high, particularly if there are large or expensive to maintain common areas such as gardens or pools.

The above costs are indicative of the types of expenses you will incur - but there may be others.

Gearing

Successive Australian governments have helped Australians to put together an investment portfolio by offering a range of valuable tax-driven benefits. Most costs associated with investment property are allowable tax deductions. Where the rental income does not fully cover the expenses, then this is referred to as negative gearing.

Be diligent when gearing – make sure a specialist has worked through the cash flows for you. You make money only when the net capital value of the property increases by more than the net negative out-goings. This is the path to wealth for many Australians but there have been those who have made mistakes, and expert assistance is a must when starting out. Do not forget capital gains tax - the tax on the increase in the value of your property between when you bought it and when you sold it, although retirement and holding it for longer than 12 months significantly reduce any tax payable.

Investment

Finally - and most importantly - remember that property investment is fundamentally that - an investment.  Far too many people are seduced into believing that their wonderful investment will eventually become a "second home" and select a house accordingly.  Often, they can do better by investing in another area or even another type of property, eventually realising an investment gain and doing far better than they would from a purchase driven by emotions.

Likewise, be careful of the property you buy and the companies you liaise with. If the properties they are offering you are not advertised on realestate.com.au or publicly available, be very cautious as there will be a reason for it.

Generally speaking, investment advisors who provide full advice on the complete range of your investment needs are strictly and closely licensed by the Australian Securities and Investment Commission (ASIC). Unfortunately, many operators in QLD are not. With APO Finance you can trust that you have experience and knowledge guiding you.

Investing in Property

When it comes to making the most of an investment property, finding the right home in the right location is only half the battle; finding the best finance is the other half.  Many options are available and the choice of home loan will ultimately depend on your particular investment strategy and the type of property. Here are the three main choices.

1. Standard variable rate or fixed rate home loan

Depending on your circumstances, most lenders will let you borrow up to 95 per cent of the purchase price for an investment property. You may, however, be required to take out lenders mortgage insurance.

2. Interest only home loan

With an interest only home loan, repayments only cover the interest component. The principal is repaid in full at the end of the loan term (usually three to five years). Because borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.

3. Equity home loan

If you already own or substantially own your home, you can borrow against the “equity’ you have accumulated. Equity is simply the difference between what your property is worth and what you owe.  For example, if you have $200,000 to pay off on a home worth $500,000, you have $300,000 worth of equity.  An equity home loan gives you a line of credit on your mortgage up to an approved amount. The loan can be taken in full or in stages, making it particularly useful for property investing.

Important extras

Loan features that may offer tax benefits or help you pay off your investment loan sooner include:
Interest in advance home loan (lets you pay next year’s interest in the current financial year, thus creating a tax deduction for eligible borrowers) mortgage offset account (lets you use savings and interest earned on savings to pay off the loan principal) and capitalised interest loans (meaning you pay only a portion of the standard variable).

Negative gearing and tax implications

If you've got money to invest, one of the options you may consider is gearing.  With correct financial advice and with the selection of the right property, gearing can provide great tax advantages. That's great if you're thinking about entering the property investment market for the first time, or want to increase your investment portfolio.

How do you negatively gear a property?

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. Put simply, your investment must make a loss before you can claim a tax benefit. It works not only for property, but also shares and bonds. For example, you buy a $400k property costing you $100 a week over 10 years ($52k total), within 7 to 10 years your property would have doubled in value to $800k giving you a 400k profit. For every dollar they put in, they are accumulating 8 dollars for every dollar in ten years. Find another investment with that type of return?

Investment expenses that you can claim as a deduction

Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:

1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and recurrent expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, gas, water, gardening and insurance.

2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once. Depreciation schedules are set by the Taxation Department and range from a few years to more than 20 years.

3. Claims for building allowances – Owners can also claim depreciation of capital works, specifically for building and landscaping. The current rate is 2.5% over 40 years.

Risks associated with gearing

There can be risk if you gear the wrong type of property or the wrong type of asset. We do not recommend buying an old property in an expensive area with a poor rental return hoping for capital growth, as the cash flow burden combined with high ongoing maintenance costs may mean the investment is a cash drain and impacts on your lifestyle.

You can minimise the risk of gearing by:

• Choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period, without high maintenance and with a good rental return.
• Having a sufficient income to cover the interest repayments if your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to fund ongoing repairs and maintenance.
• Taking out Mortgage Protection Insurance with your investment loan.

Example

Rental income on investment property		$2,000	per month
Less	Expenses (interest, maintenance etc)	- $2,500	per month
Less	Council rates and other expenses	- $100	per month
Leaves	Shortfall	- $600	per month

This example shows how an investment asset may be negatively geared. The net loss of $600 per month ($7,200 per annum) may be claimed as a tax deduction.

Positive gearing

You can also positively gear a property. This occurs when the investment income exceeds your interest (and other possible deductions) expense. Note that you may be subject to additional tax on any income derived from a positively geared investment.

Investing in real estate

Investing in property is simply another form of investment. You can invest:

• directly by buying property yourself or
• indirectly by investing in a managed fund, including timeshares.

Although real estate agents may understand the property market, you should still seek some independent advice from the APO group, because property investment might not be for you.

Licensing of real estate agents

Real Estate Agents, Salespeople and property managers are licensed by their relevant state and territory bodies.

You can check ASIC's databases to see if a real estate agent is licensed or is an authorised representative of a licensed adviser. If you think the real estate agent might be providing financial product advice to you and you cannot find their name on the registers, please contact the ASIC Infoline at infoline@asic.gov.au or on 1300 300 630.

Before you buy real estate as an investment asset

Most of our advice about investing also applies to investing in property. Here's some general advice.

1. Be wary of pressure selling techniques and high pressure seminars

Some sales people can be extremely persuasive and persistent. They often use gimmicks like offering you a "once in a lifetime opportunity". Read the warnings from The Office of Fair Trading about investing in real estate through investment seminars

2. What are your overall financial plans?

Before investing in any asset make sure your decision fits into your overall investment strategy. If you don't have an overall investment strategy then now is the time to develop one:

• Think about what you want to achieve financially and how soon  you want to achieve it.
• Set yourself goals.

3. Understand the risks involved

Make sure you are comfortable with the risks associated with a particular investment. All investments carry risks. Generally the higher the risk, the higher the returns, with geared residential property as the exception.

• Do you know what the risks are in real estate?  Can you sleep at night knowing this?  If you can't then perhaps you should invest in an asset with less risk.
• All good financial plans will split your money up against a range of assets in order to spread the risk.  Think about this as you think about investing in real estate.  Will you have all your eggs in one basket if you buy a particular piece of real estate?
• Remember that all types of investments have cycles of profitability and cycles of stagnation. These cycles can last for up to a few years. Will real estate cycles fit your financial plans?

4. Getting advice

Decide whether you need professional advice. If you're dealing with a financial adviser then make sure they're licensed by ASIC.

5. Investing directly or indirectly

You can invest indirectly in many assets, including real estate, through a managed fund. Timeshares are a type of managed investment scheme. At APO Group we are advocates against indirect investments, as you are reliant on too many factors outside your control and they do not offer the best bank for your buck, nor the ability to control, borrow and leverage like direct property. If Mr A. has $5000 per year to invest, he will do infinitely better over 10 years by leveraging and investing in residential property.

6. Do your homework

Find out as much as possible about any investment you are making. Make sure you really understand the pros and cons of the choosing a particular investment asset. Weigh the advantages and disadvantages against your financial goals.

Tax and social security issues

There may be tax issues to consider that your real estate agent may not understand. Your tax accountant could be a good place to start to check the numbers and tax issues.  Centrelink's Financial Information Service conducts seminars about real estate investing, and you can also make an appointment to discuss your personal situation even if you are not receiving any Centrelink benefits.

Looking after your investment assets

Love your paperwork. Read and keep all documents you receive about your investment.

If your asset is being managed by someone else, then make sure they keep you informed of what is happening:

• Insist that they give you written records and reports. Chase them up if they don't arrive.
• Ask questions if you're not sure. Reputable investment managers will be happy to answer your questions and will expect you to take an interest in your investments.
• Make sure you give all your instructions to a manager in writing. Also tell them what limits they have to act on your behalf.