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Frequently Asked Questions

What is a residential investment property?
A residential investment property is a house, townhouse, villa, terrace or unit which the owner does not use as a personal residence but rather with the intention that it be rented out to tenants. This allows the investor to benefit from both taxation advantages and rental income from the property.
Do I need a cash deposit for an investment property?
Cash is not necessary when you have equity in your own home. Having sufficient assets against which to borrow is all that is required. In this way, you can borrow the full investment amount plus any additional costs, to keep your cashflow and budget where they can provide most benefit.
With low inflation is property investment a good strategy?
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, the expectation would be that property would perform at this level above inflation. Everything needs to be put in true perspective and if inflation, and consequently capital growth, are lower relative to everything else, property should still be better than any other form of investment
Can we buy a new property to live in and keep the one we are living in now as a rental property? Is the loan tax deductible?
The short answer is no, the loan is not tax deductible. 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 not for the purpose of producing income. For costs to be tax deductible, the investment must clearly be for producing income.
What is the best area or suburb for capital growth?
The wise investor knows it is false economy to spend a huge amount of time searching everywhere for gems. It is virtually impossible, and really unnecessary, to gauge just where the most valuable suburbs will be in the future. History has shown that well located property in a major city such as Sydney, Brisbane or Melbourne should follow the pattern of around 10% to 11% capital growth over the long term. If your property achieves better than this, it's more likely good luck than good selection. Rather than spending weekend after weekend driving from one side of the city to the other, you can maximise your returns and better manage your investment by organising your finances in the best possible way and ensuring that you pay only fair market value.
What if interest rates rise?
Most investors opt for fixed interest loans. If interest rates rise, then you are insulated against rising repayments. On the other hand if interest rates fall you should still be smiling. Have you noticed how low interest rates are usually followed by an increase in property prices? Also, if variable rates do rise, you are buffered by the tax refund.
The banks have knocked my loan application back, where do I go from here?
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 and liabilities statement. You not only assure yourself that you can do it, but also you 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 Australian cricketer Sir Donald Bradman, failed to score 10 runs just as many times as he scored a century. Continue until you find a manager who will listen.
Real Estate Agents say position, position, position. Should I listen to them?
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 beach if you have borrowed money using a principal and interest loan over 10 years with an interest rate of 12.5% and the property is so run down that nobody wants to rent it. Quality, new property, well located, correctly financed and properly managed will outperform property selected on the basis of position alone.
What if the real estate market slows down?
Holding on to an investment property of at least 10-15 years will ensure a buffer against any cycles in the market. It's important to keep sight of long term goals and not be distracted by any short term hiccups. What happens to property values from one year to the next should not concern you and although property can be cyclical, history shows that around 8% to 11% growth in Australian capital cities has been achieved long term. Long term property growth generally performs at several per cent above inflation. Although, you must remember that past performance doesn't guarantee future profits it can only be used as a guide.
Should I buy a unit or a house?
There are many financial factors to be considered in property selection, before personal preferences. Houses may experience better capital growth because of the higher land content, but the maintenance could be higher and the yield (rent/value) could be lower. So in the longer term, the returns from units could be the same or similar as for houses. Also, it's a case of horses for courses and the different tenant profile in some locations predetermines the suitability of houses, units or flats. In certain areas, units or townhouses may suit young professional couples whereas in the suburbs, young families might be more attracted to houses.
What if I don't have time to manage my own investment?
Maintaining control of your investment does not have to mean active involvement. Once a property has been purchased, your involvement can be reduced to a minimum through the use of an effective property manager. The right kind of management will save you time, money and headaches. Managers can assist you in some or all of the following areas; maintenance, tenant screening, rent collection, preparation of lease, inspection and tenant relationships. It is important to look for someone who is not only a good manager but also someone who runs the rent-roll like he would run his own business.
What if I have a bad tenant that damages my property?
With the right property management, tenant difficulties should be reduced to a minimum. There are comprehensive insurance policies on the market that will protect your property against most forms of damage, these include:- Default of rent . Malicious damage by tenants, Departure of tenant, Theft Denial of access by tenant, Breaking of Lease etc.
Is more expensive better or should I pay the cheapest property I like?
The real rate of return for higher value property in the long term could be the same as, or lower than, a property in the lower end of the market. Just because a property valued at $200,000 might generate $240 per week, it does not mean that a $500,000 property will rent for $600 per week. The rental market can only bear so much, and the market will dictate the rent. Also there will be fewer people who can afford to pay the higher rent, so this will limit your choice of tenants. Another consideration is that upper end of the property market is much more volatile and timing of the purchase becomes more critical.
With $250,000 in equity in my own home, how much can I borrow to buy more property?
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. There are 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.
My house is worth $700,000. Should I sell and buy a cheaper property or should I stay put and borrow against my own home to buy more?
You could downgrade and put the excess into a rental property where you will be able to have ore property working for you, however, when you are deciding just how much you want to invest, it's important to take personal considerations into account. You could live in a tent and own 10 investment properties or you could live in a mansion and own nothing else. Somewhere between the two extremes you should find a happy medium.
We don't have any disposable income now, how can we afford to invest?
If you have already made the commitment to pay for necessities first and luxuries last, then your problem is more of a perceived problem than an actual problem. Too often we think of an investment in the same light as our first home. This being the case we tend to see the interest payment as creating an enormous burden. But your contribution to the interest bill remember, is after the tenant and the taxman have paid their share, and it gets less over time as rents increase. In addition, deductions and other benefits help you to improve your initial cash flow though reduce PAYG tax instalments which mean you don't have to wait up to two years for your tax return.
Should we purchase in one name or both?
Generally, 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.
Am I better off buying one property for $900,000 or two for $450,000?
Generally it is better to buy more than one property at the cheaper price, but this depends entirely on the area in which you are buying. A $900,000 property in an inner Brisbane suburb may be the bottom of the market in that area, whereas a $900,000 property in West Wyalong, NSW would probably be a mansion. In Brisbane a $900,000 property would be OK but not so in West Wyalong. 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. Also, how many buyers are there in west Wyalong?
Is brick and tile the only building product to consider?
A new property as an investment is generally better than old, and 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. 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 yourself if you don't enjoy it. Too many landlords try to do everything themselves instead of using tradesmen. If the cost has been factored, remember it is a tax deduction.
With an interest only loan, when do I actually get to own the property?
While it is true that, with an interest only loan, there is 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.
Is negative gearing safe?
The Keating government 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. Recent statements by the major parties concur that no government should make that mistake again.
Will they ever get rid of capital gains tax?
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 the tax and to remove it now would mean drastic cuts to sensitive areas such as education and health. For this reason 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.
Is buying a rental property only for those with a secure income and not for the self-employed?
What is a secure income? No job is 100% safe and the precautions you take with your investment properties are commensurate with the degree of risk you attach to your current employment. For example, a government employee with a seemingly "secure" job may only need to have some cash in the bank, access to a lot of credit cards and a line of credit mortgage facility. On the other hand, a self-employed truck driver should have disability insurance, income replacement insurance and possibly mortgage repayment insurance. In fact a risk management strategy is essential for every investor. Don't let the prospect of losing your job prevent you from undertaking a loan for a rental property. Simply take all the necessary precautions in case the unexpected happens.
Is a holiday house a good investment?
If purely for investment, the returns can be as good as permanent letting if it is let for half of 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. 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.
We were brought up to believe that we shouldn't borrow money. Were Mum and Dad wrong?
Yes and no! The golden rule of borrowing money is to borrow for appreciating assets such as property, not for consumable that depreciate in value. Our parents were right in deterring us from borrowing money for cars, holidays and swimming pools and other consumer items that ultimately are worth less. 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.
Why hasn't my accountant told me about investing in property and effective gearing?
We probably expect too much of our accountants. They should be able to answer your questions competently, but don't expect them to be creative in guiding your wealth 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, certain accountants who specialise in property even have some rental property of their own.
What happens if we approach a recession? Is it still a good time to buy rental property?
The herd mentality of the population is such that everyone buys when everyone else is buying and sells when everyone else is selling. (Statistics show that most investors bought in the midst of the last property boom when interest rates and property prices were at their highest!!) Successful investors look on a downturn in the economy as a great time to buy and they then take all the necessary steps to ensure that they are able to hold long term to reap the rewards of future recovery. Remember investing in property is a long term strategy.
What if i need some money in a hurry?
Today, more than ever, residential property offers a lot of flexibility for the investor. If for some reason you need money in a hurry, various banks will allow you to draw the equity off your own home simply by refinancing.
Don't more people want to buy their own property?
In 1978 approximately 73% of people owned the home they live in, by 1988 that had dropped to 66%, In 2010 the percentage of people who own the home they live was down to 49%. This means 51% of Australia's households are being rented. The pool of people who have no choice but to rent is increasing.


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