Investment property, it is something you hear many Australians speaking about, either at the water cooler or the weekend BBQ! What is it about Investment property that is so enticing to Australian investors? What drives Aussies toward this asset class ahead of shares and managed funds? Have you considered investing in property and just not known enough to make an informed decision?
If investing in property is something you’ve considered, then there are a number of key factors that you need to be aware of right now that make property investing a very attractive investment option to consider.
One of the main factors is the current incredibly low home loan interest rates. The RBA has been cutting interest rates in an effort to bring back confidence in our recovering economy, and the best part is that low rates make it cheaper to borrow money! The good news is that this tactic by the RBA has proven to be successful. Confidence in property is back, especially with investors.
Capital Growth
Why do investors consider property? It is not just for the rental yields typically, it is for the capital growth! And the results show that despite limited growth over the previous few years, there is solid evidence that it is now back on track in some of the southern states capitals, which would be expected to carry on to the local Qld market. Local agents have even been reporting a lack of listings and up to 100 people at open houses! It is this supply demand equation that eventually results in solid capital growth performance!
According to the Australian Bureau of Statistics, the mean price of residential homes across the nation rose by $17,700 in the December quarter to $539,400. Most of this growth was in Sydney where values rose 4.7 per cent in the quarter. This compares with 3.3 per cent for Perth, 2.6 per cent for Melbourne and 2.8 per cent for Brisbane.
So who is driving this growth? It is the Investors’ that accounted for about 40 per cent of all new home loans issued in December 2013. I would say confidence is well and truly back for investors.
Benefits of property investment
So what’s the main attraction of investing in property? For starters it is the level of gearing available to investors looking at purchasing property. The banks must consider property a pretty safe investment as they will lend up to 80% of the purchase price with no mortgage insurance, and up to 95% with Mortgage insurance. Secondly, the rental income on the right property can cover the majority of the holding (ie interest, rates and insurances) of an investment property. However the real attraction is the potential for capital growth. Property is often regarded as a good long-term investment and a safe haven when other types of assets (such as shares) are experiencing volatility or falling in value.
Rental income is the key with finding a great property (and saves you paying the holding costs yourself), and the current situation of low vacancy rates in most good locations is another great positive in the current market. This also results in higher rental yields as well. Rental yields can often fall however as house prices rise but the low vacancy rate is leading to increases in rent in many areas, which is keeping yields strong.
What is negative gearing?
This is one of the most misunderstood thing about property investing, and while I don’t have the time to explain this fully, here is the basics: When you’re negatively geared, it means that the deductible costs (expenses) of your investment are higher than the return (rental yield) that you receive from it. And if you’re a high taxpayer, this is a positive tax advantage. Essentially, by being negatively geared, you can deduct the costs of the property from your total income and this reduces your tax bill.
This is where it can be confusing for many prospective investors, as they assume that a property has to have a negative cash flow (ie cost you money every month) in order to obtain negative gearing tax benefits. This is not always the case, as one of the deductions that you can claim is depreciation on the house value, which for the right property can be considerable. Even though the property may have a neutral or positive cash flow (ie costs the same or less than the rental income), you may still get tax benefits due to the depreciation claimed on the property. This shows the importance of research and speaking with someone who can provide sound advise around what the cash flow for a particular property will look like.
So the right property could cost you nothing to hold (especially in the current low interest rate environment) and have some clear scope for capital growth and rental appreciation. Buying a property with the sole purpose of tax deductions really doesn’t make a lot of sense, there should be some real benefit for you long term from potential capital growth.
Financing an investment property
It is important to get the right loan structure upfront so you can benefit the most from the tax advantages.
There are a range of loans available for investment purposes. Interest-only loans have historically been very popular but when capital gains are flat these can be dangerous, however a good adviser will take all of your personal circumstances into consideration before advising you on what would suit the best. For instance, if you still have non deductible debts, it would often be recommended to pay these down first before paying down the investment loan.
If you already have equity in another property, you may be able to borrow against the equity you have to purchase an investment property, and potentially borrow 100% of the purchase price. Just make sure you get clear advice on this structure to avoid any run ins with the ATO, as only the interest on the investment property is tax deductible, so you need to be sure that you don’t contaminate your investment debt with your home loan.
Investing in property has proven to be a worthwhile investment over time, however, you need to take a long term view as the entry and exit costs are quite high. With the current low interest rate environment, the strong rental yields, the potential capital growth after several years of inactivity and the uncertainty/volatility in the share market at present now is the ideal time to speak with us about investing in property and how much you can borrow.