Purchasing an investment property is a big decision and one you have undoubtedly made with a view of benefiting from this purchase at a later date. Your decision to be a landlord for a rental property should not be a short term investment. There are costs associated with the purchase and sale of properties and to make it worthwhile, you will need to hold on to your investment long enough to cover the costs and make a healthy gain when you eventually sell.
The idea behind the purchase of an investment property is that the property will be rented out which helps with the ability to finance the investment and that during this time, the property will appreciate resulting in a profit when the time comes to sell.
Australia provides taxpayers with the opportunity to benefit from negative gearing aspects associated with investment properties which can assist in the decision to being a landlord in the rental market a worthwhile option and exciting venture.
To have a positive experience in owning investment property ensure that you seek expert advice from professionals who have your best interest in mind. This advice will ensure that you are aware of the various costs associated with rental properties, the best tax saving tips, the property which will offer a good return and the options for various loan structures.
There will be various tax considerations to be aware of such as what will be deductible and what will be treated as a capital expense and the various treatments of both. Depreciation matters and Capital Gains/Losses will also be of importance, therefore, it is imperative to place your taxation matters in the hands of a good tax accountant experienced in investment properties.
Without the good advice of these experts, your investment could be a costly exercise which take a considerable time to recover from.
Pat and Trish decide to purchase an investment property. The house they l! ive in h as a good amount of equity so they will be able to purchase an investment property and use the equity in their home as the deposit. They fall in love with an old home with lots of character in a suburb nearby. They decide to take out a loan of $367,500 for the purchase ($350,000) and fees ($17,500). The loan they applied for had the option to fix the interest rate for 5 years which they opted for as a safe guard against any rise in interest rates.
The property is rented almost immediately for $350 a week so they are off to a good start. Two months down the track they receive a call from the tenants complaining about leaks in the roof and gutters. After obtaining some quotes to repair the damaged roof and gutters they realise they do not have the $23000 required to pay for the repairs so they go back to the bank and obtain another loan to cover the costs. They had only just managed to be able to have the additional funds approved as their serviceability based on their income only just scraped in.
Three months go by and the tenants approach Pat and Trish again to advise them that the property is having major drainage problems. When the problem is inspected, it seems the roots of a tree has broken the sewerage pipes. The quote to repair the pipes was huge at $17,000 and Pat and Trish could not obtain anymore finance from the bank. They decide that the only choice they have is to sell the property.
The tenants move out. 4 months go by and Pat and Trish eventually sell the property. Due to the drainage issue it took longer to sell than normal and they ended up having to sell the property for $10,000 less than they they purchased. On top of that, they had to promise to fund the costs of repairing the sewerage pipes within 2 months. The costs associated with commissions to the real estate on the sale added another $10,200 to their loss.
When they approached the bank to advise of the sale and obtain the payout figure of their loan, they were reminded of the early repayment fees they will ! incur du e to the loan being paid out while still in a fixed term period. Pat and Trish were shocked as they had no idea that this would come to the amount of $24,000. The repayment fees were stipulated in the contract, and the mortgage broker providing the loan advice did make mention of fees in connection to early repayment but Pat and Trish did not realise how high the fees would be. They had also heard that exit fees had been abolished and presumed that cancelled out any fees associated with the early repayment of the loan. They soon found out that early repayment fees were not classed as exit fees.
Pat and Trish had no choice but to suffer the loss associated with the investment property. The costs incurred with the purchase and sale, the holding costs of insurance, rates and interest, the repairs and the early repayment fees, Pat and Trish made a loss of over $100,000 in less than one year and were still left with a part of the investment loan to repay. The loss was more than what Pat and Trish made from their employment in a year and it would take them a long time to recover from this.
Thankfully, Pat and Trish were able to make some tax savings due to the negative gearing impact in their tax return. Because their costs outweighed their rental income by a substantial amount, they were able to offset it against their employment income and save thousand of dollars in tax. Although in this case the negative gearing eased the impact of the losses, the amount of money which Pat and Trish spent which resulted in the tax savings are far from a positive outcome.
The early repayment fees and the cost of repairing the drainage, were not deductible as an expense in their tax return, however, they formed part of the cost base when calculating the capital loss of the investment property on the sale. They will not be able to offset that loss until such time as they make a gain on another investment property should they choose to invest again. They are also still repaying part of the loan for a property! they no longer hold.
Purchasing an investment property is a positive way to create wealth and can be done very successfully with the right advice. Many investors have made their fortune buying rental properties which in many cases even earn them a healthy income. It is an excellent means of saving as it provides an avenue for those with extra funds a way to make the money work for them. There are many success stories and it is not unusual for someone who has purchased an investment property to sell the property 7 years later and make a gain of $400,000. Not a bad earning when you consider the amount of years you would need to work to generate that amount of wealth.
Investment properties are still considered to be a positive option in Australia. Currently there are opportunities available for investors to purchase properties with a $10,000+ rebate from the Government annually for 10 years which results in it being cash flow positive. This means the purchaser can buy rentals which may end up not costing them anything at all. In fact, at the end of the year after all costs are realised, there can be a nice profit to be celebrated.
Good opportunities are available, however, expert advice from a professional is the first and best investment to make in ensuring wealth creation is a lucrative event.
Marian Trinick is a Public Accountant, Tax Agent and Mortgage Broker. Marian owns a business in Coogee Western Australia offering a multitude of services to individuals, sole traders, partnerships, trusts, companies and investors. Her Mortgage Broking experience extends to personal, motor vehicles, properties, leases, equipment finance, smsf and business. Marian has a wealth of experience and expertise in the property investment market and can provide the advice on the optimum tax savings and the best loan to suit your situation. Find out where Marian is: http://www.cockburnfinancialservices.com Call Marian now to find out how you may be able to invest in property and be cashflow positive at ye! ar end r esulting in you not paying a cent for the investment. Also, ask Marian how you can borrow the funds to invest using the equity in your current property as the deposit. Refinance now and see how much you could save! 08 9434 2371 or 0412 266 597. ACL: 395605
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