FAQs
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[ FAQ ]
Am I better off buying one property for $200,000 or two for $100,000?
Answer: Generally, it is better to buy more property at the cheaper price, but this depends entirely on the area in which you are buying. A $200,000 property in the inner city may be the bottom quarter of the market in that area, whereas a $200,000 property in a provincial town would probably be a mansion. In the former case, a $200,000 property would be OK but not so in the latter for a number of reasons. Firstly, a property in the lower end of the market has a higher rental yield, which results in a better cash flow. Secondly, the lower rent should attract more tenants. Thirdly, if you wish to sell on your retirement, there's more flexibility in selling one small property rather than one large one. And finally, if you're selling, property in the lower quarter of the market should attract other investors as well as first-home buyers, so there should be more potential purchasers.
[ FAQ ]
Can I buy a property in partnership with a friend?
Answer:
You can buy a property with a friend if you wish. Tenants in Common ownership (on the Land Title Document) allows two or more individuals to own a fractional interest in a property.
Where two or more unrelated investors wish to buy a property tennants in common allow each investor to hold a separate and distinct share in the property.
[ FAQ ]
I don't seem to have much spare money as it is now. How am I going to afford to buy an investment property?
Answer: If you have already made the commitment to pay for necessities first and luxuries last, then the only remaining stumbling block is more of a percieved problem than an actual problem. Too often, we think of an investment property in the same light as our first home. This being the case, we tend to see only the interest payment as creating an enormous burden. But your contribution to the interest bill, remember, is after the tenant and taxman have paid their share, and what's left may be as little as $80 in the first year - and it gets less over time as the rents increase. In addition, section 221D of the Taxation Act may help you to improve your initial cash flow though reduced PAYE tax instalments which means you don't have to wait up to two years for your tax refund.
I have $300,000 in equity in my own home. How much can I afford to borrow to buy more property?
Answer: It's not just a case of how much property you have to borrow against. It's just as important to consider your ability to service the loan. I have known people who own several million dollars worth of prime rural land, but because their income is limited, they are not capable of borrowing very much at all. No matter what the value of your properties, when it comes to borrowing money, we are generally limited by cash flow.
I've been to several banks and they all say I can't afford an investment property. Where do I go from here?
Answer: It's quite common to find people turned down for a property investment loan, even though they feel sure they can afford it. Don't be disillusioned if your first approach to a bank is unproductive.
It's up to you to prepare a budget and an assets/liabilities statement to not only assure yourself that you can do it, but also to assure the financier. In some cases, the financial institution won't have taken the tax refund into account, and this can make all the difference. Don't stop at the first 'no'. The great American baseballer Babe Ruth failed to get to first base just as many times as he hit a home run. Continue until you find a manager who will listen.
[ FAQ | About the Market ]
Is a holiday unit at the coast a good investment?
Answer:
It can be if you are careful to distinguish between an investment and a luxury. If purely for investment, the returns can be as good as permanent lettings if it is let for half the year at twice the normal rental.
This means that you use the unit when it is not let rather than letting it when you are not using it. If however, you want it solely for your own holidays thinking it will serve as an investment as well - think again.
None of the expenses (including interest) is tax deductible so it could be an expensive luxury. By the time you have created your wealth, you should well be able to afford a luxurious holiday unit that you can use at any time you so desire.
Is property investment still OK if inflation is low?
Answer:
It's not so much the absolute capital growth rate that is important, but rather the growth relative to inflation. With capital growth historically averaging between 2% and 4% over and above inflation, even if inflation were to fall, I would still expect property to perform at this level above inflation. In America, where annual inflation has been slightly lower at around 6%, property growth has averaged more than 8% per year, which is still that couple of percent above inflation.
Everything need to be put in true perspective and if inflation, and consequently capital growth, is lower relative to everything else, property should still be better than any other form of investment. Furthermore, interest rates would have to fall, reducing the cost of the loan to such an extent that the overall rate of return (above inflation) on the property investment should remain about the same.
Most people seem to emphasise position, position, position. Should I buy prime residential property?
Answer:
Property in prime locations does experience strong capital growth, perhaps slightly higher than normal, however the real return cannot be measured by the growth alone.
There is not much point in purchasing a property one street back from the main shops if you have borrowed money using a principal and interest loan over 10 years with an interest rate of 18% and the property is so run down that nobody wants to rent it. I believe that property that is well-located, properly financed and properly managed will outperform property selected on the basis of position alone.
[ FAQ ]
My wife isn't keen on the idea of buying an investment property in my name only. Is there any alternative?
Answer: There's not much point in putting a negatively geared property in joint names when the wife is not working, just in case of a marital break up. It is most tax advantageous to buy the property in the name of the highest-income earner. If you are at all worried about divorce, get a solicitor to draw up a written statement as to the equitable division of all your assets, regardless of title of ownership. This may only cost a small amount, compared to the thousands of dollars of potential tax savings.
[ FAQ ]
Should I avoid timber houses because of the extra maintenance?
Answer:
As an investment, timber houses can be just as good as brick houses. Usually they are cheaper than a brick equivalent, which may compensate for their maintenance later.
Or if it is a very old house, it is quite possibly in a good position, being closer to the town centre - in which case, it may be more attractive to tenants or experience slightly greater capital growth that again compensates for the maintenance. But don't try to do all the maintenance youself if you don't enjoy it. Too many landlords try to do everything themselves, instead of using tradesmen.
We own our own house but want to borrow money against this house to build a bigger and better house in which to live. We would still like to keep the one we're living in now as a rental property. Is the loan tax deductible?
Answer: The short answer is no, the loan is not tax deductible. This is a classic situation in which many property owners find themselves when they first decide to upgrade. Assessing whether interest on a loan is tax deductible depends on the purpose of the loan - not the collateral for the loan. In this case, the purpose of the loan is clearly to build a new home and not for the purpose of producing income. This situation is a double loss. Not only would the interest on the loan not be tax-deductible, but the rent from the investment property would be taxed at the highest marginal tax rate.
A simple solution could be to sell the first home and put the proceeds into the new home; you would then borrow to buy a rental property, using the equity in the new home as collateral. The interest on the loan would then be tax-deductible and instead of paying tax, a tax refund would more likely result.
However, there may be alternatives. For example, if the first home had been bought in the wife's name only, the husband could borrow the money to buy the property from his wife, and she could put the money she recieves towards the new house. A legally binding contract is needed, and stamp duty must be paid, however, the tax benifits may far outweigh the transfer costs. I would recomend that you check with both you solicitor and accountant before you attempt any transaction of this nature.
[ FAQ ]
We were brought up to believe that we shouldn't borrow money. Were Mum and Dad wrong?
Answer:
Yes and no! The golden rule of borrowing money is to borrow for appreciating assets such as property, not for consumerables that depreciate in value.
Our parents were right in deterring us from borrowing money for cars etc, which ultimately are worthless. However, no one bothered to explain to them that debt, if used for appreciating assets such as property, is a most important tool in building wealth.
[ FAQ ]
What if a consumption tax (Good and Services Tax - GST) is introduced and personal tax rates are cut. Will this affect property investment?
Answer:
Initially, the value of most commodities will rise causing an increase in property values. This is because both land development costs and building materials will increase, directly affecting property values.
Longer term, although the tax effectiveness will be marginally less, everything is relative and all other tax-advantaged investments will be similarly affected. If residential property outperforms all other investments now, then there is no reason to expect that this will be any different with a consumption tax.
What if I have no deposit for an investment property?
Answer: What you mean is that you have no cash deposit. Cash is not really necessary when you have equity in your own home. Having sufficient assets against which to borrow is all that is required and in this way, you can borrow the full amount plus all the additional costs.
[ FAQ ]
What if negative gearing is abolished?
Answer:
The government has already made the mistake of abolishing the right to claim interest losses from rental property against other income. The turmoil in the rental market that occurred when investors took flight was so great, that it was reintroduced within two years. I believe the government is unlikely to make the same mistake twice.
But in the unlikely even that it does, I wouldn't expect the change to be retrospective and it would be a matter of adjusting the debt to balance the rental income.
[ FAQ ]
Why hasn't my accountant told me everything about investing in property?
Answer:
When you go to the garage for petrol, does the mechanic come running out to suggest that your brakes need checking or that it's time for a tune up? We probably expect too much of accountants. They should be able to answer all of your questions competently, but don't expect them to be creative in guiding your wealth creation program.
Accountants are usually specialists in their area of expertise - accounting. They will expertly complete the tax forms for you after you have provided them with all the figures. They are usually not specialists in property investment and should never be relied on as such. However, there are some accountants who do specialise in property - and even have some rental property of their own.
Will they ever get rid of the capital gains tax?
Answer:
Revenue from the capital gains tax is now firmly entrenched in the government's budget. Since it was introduced in 1985, billions of dollars have been collected as a direct result of tax and to remove it now would mean drastic cuts to sensitive areas such as education and health. For this reason, I believe it is here to stay.
However, it is not the bogey it is made out to be and it should not really affect long-term investors. If you don't sell, you don't pay and because it applies only to gains above inflation, it is usually minimal if you do sell in the long-term. The tax was intended to encourage long-term investment and discourage short-term speculators - and this it does very effectively.
With an interest-only loan, when do I actually get to own the property?
Answer:
While it is true that, with an interest-only loan, there is a perpetual debt on the property, you retain title to the property at all times. Whether you ever get to "own" the property outright is irrelevant. What is important is your equity in the property and how fast it increases over time.
Eventually the debt will be insignificant compared to the property value. Reducing the principal reduces the interest claimable and you'll then pay tax on the rent. So why pay it out? The only loans you should pay out while you are building wealth are those that are not tax deductible - such as the loan on your own home or car.
Won't there be a glut of vacant properties when everyone discovers the advantages of owning rental property?
Answer: Firstly, let me remind you of the number of people who take any step towards becoming financially independent - there's such a small percentage of the population in the running to buy rental property. Secondly, people have been renting property since time eternal, and with more than 30% of the population renting, and this percentage increasing, tenants will not disappear overnight. There should always be a pool of tenants looking for rental accommodation and it's up to you to make your property most desirable.
Supply and demand in rental properties is cyclic and vacencies can and do occur from time to time. However, the baker doesn't expect to have customers in his shop every minute of the day from early morning until night and having a property vacant for a time is par for the course. But there are certain things you can do to keep this time to a minimum. Choosing the right property in the first place helps and well-located, well-maintained properties with reasonable rents attract more tenants.
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