Tag: Investment property

Categories
Finance

What is negative gearing?

Negative gearing is a rising trend among investors. People who want to purchase investment properties often need to borrow money from lending institutions. When people borrow, they calculate the risks and potential rewards carefully. Most ordinary investors will try to ensure the monthly profits from their investment property will surpass the mortgage repayments and interest rates.

Negative gearing doesn’t follow the same rules. People borrow money knowing that the profits from the property won’t cover the monthly interest and mortgage repayments. Investors make up for the shortfall between the interest payments and income earned with the help of deductions from their current income tax. Negative gearing is prevalent in Canada, Australia, and New Zealand because of the tax policies and concessions in these countries.

What is the benefit of negative gearing?

Why would you invest in a property that doesn’t offer profits that actively cover your expenses? Even if you get a tax break from the government, you don’t earn enough profit through rent to justify the initial investment. Here’s what you need to understand about negative gearing:

  1. Negative gearing works because investors don’t intend to retain the property over the long-term. Their investment only bears fruit after they pay off their loan and sell the property.
  2. For negative gearing to be profitable, the property must be a part of a thriving housing market. Property values should increase over time instead of remaining steady or decreasing.
  3. If you purchase the right property in the right market, you can potentially earn several hundred thousand dollars in profit. This investment is risky and can potentially lead to complete loss of money.
  4. Investors need to plan carefully and ensure they have enough financial stability to bear the shortfall between interest rates and income even with the tax break.

Negative gearing is a financially sound decision only if your capital gains are greater than your initial investments and related expenses.

How does negative gearing work?

You need to consider a number of factors before you invest in negative gearing. If you don’t plan your investment well, you can face losses amounting to several thousand dollars. Here’s what you need to consider:

  1. The total income from the property. For this, you need to multiply the weekly rent by 52 to calculate the annual income.
  2. Tally all expenses including mortgage repayments, vacancy, repairs, insurance, manager fees, bank fees, council rates, water rates, land tax, strata fees, and property improvements costs.
  3. Subtract the total expenses from the income. Deduct depreciation as well.
  4. Calculate the amount of tax you need to pay and determine how much of it will be refundable.
  5. Consider the capital growth of the property in the market.

All of these factors will help you determine the capital gains from your investment. If you don’t perform these calculations, you won’t know if the property is worth investing in and whether you will get enough money to justify the investment. This is how negative gearing works and delivers profit. It relies solely on the market demand and supply as well as the growth in property rates.

An example of negative gearing

It’s not easy to understand how negative gearing works without considering a real-life example. Here is an example that illustrates how you can earn profit using this investment strategy:

  1. You purchase a $440,000 property on a loan of $400,000 with 7% interest rates. Your interest will be around $28,000.
  2. If you earn around $450 rent every week on this property, you earn $23,400 in annual rent income, which leaves you with a shortfall of $4,600.
  3. If the value of the property increases by 10%, you gain a profit of $44,000 at the end of the year and once you remove the shortfall of $4,600, you have an overall profit of $39,600.
  4. You can deduct the other expenses from this calculation and still get ample profit at the end of the year.

If the value of the property doesn’t grow by 10% or more, you won’t gain enough profit to justify your investment.

Contact local property lawyers

What expenses can you claim as deductions?

In most cases, you can claim a deduction for any expenses related to the management and maintenance of an investment property, this includes any interest you pay on loans. When your asset is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, including your salary and wages.

The rule of thumb is, property investors can claim deductions in three main categories:

  • Building allowances – in most cases you can claim building allowances such as for depreciation over time
  • Revenue deductions – you may be eligible to claim revenue deductions such as the interest on borrowed funds
  • Capital items – major items such as a oven or dryer in a rental property are subject to depreciation over time and can be claimed over several years

Are there any changes in negative gearing in 2021?

The 2021 budget includes a number of measures relevant to property investors, however it doesn’t directly address or change existing arrangements around negative gearing.

How does this affect Australians?

Negative gearing is still a good investment option for Australians, particularly if you have enough financial stability to support the shortfall between the interest rates and the income generated. The housing market is on the upward trend so you can expect the value of the property to grow comfortably over a short period of time.

It’s a good idea to consider a short-term investment instead of long term investment if you intend to use negative gearing. Most people only invest for one year and see several thousand dollars in profit. This can keep you safe from any changes to regulations the government makes in future years.

Categories
Real estate & moving

Ask a Real Estate Agent

In the current real estate market, high demand and limited land supply gives homeowners an advantage. Ray White agent Thomas Merriman and Service First Property Group specialists, Andre Pang and Oliver Quach share their responses to common questions asked by Australian homeowners.

When is the right time to sell?

Thomas: “I would advise people thinking about selling to regularly keep up to date with the Auction Clearance rates as they typically act as a ‘canary in the mine’ for property market conditions. If the canary dies, leave, if the rates drop dramatically, pause your campaign.”

Andre: “The right time to sell depends on the vendor’s financial or personal situation. Try to avoid public holidays or long weekends during your marketing campaign, but if you can’t avoid it then add another week to your marketing campaign. My clients ask whether or not they should be selling in the winter as there are typically less properties to compete with. Serious buyers never stop looking and as long as you have the correct marketing campaign in place, they will turn up to your inspection year round.”

Source: Nicheliving Real Estate

What kind of properties are in high demand in the market?

Thomas: “Properties where people can add value, either by knocking down and rebuilding or simply renovating – especially a cosmetic reno or a quick ‘flip’ – are the properties that are in highest demand. The Melbourne trend is toward ‘terrace’ style homes and premium apartments. The idea of city living with the feel of a newly built house is a pretty desirable one, providing you have the budget. Attend the first open-home for a property and you will get an idea.”

What are some things to look for in an agent?

Andre: “There are a few ways to discern between an honest agent and a dishonest one. A genuine agent will give you a realistic appraisal with evidence and research. Lots of agents will inflate sales appraisals so you can hear your dream selling price but when an agent gives you an appraisal, check that it’s backed with comparable sales and recent data. A good agent will also design a marketing campaign tailored to your property’s needs. As everything comes through the Internet these days you don’t need to limit your search to a local agent.”

What are some tips you would give to a homeowner planning to sell?

Thomas: “Buyers aren’t visionaries- they don’t have the creative flair to see past bad curtains and unmown grass, but coming to market can be delayed by weeks if vendors are busy fixing a leak because they’ve replaced the benchtop, cupboards, stools and tapware. All this can be done over a weekend or two and you can hire a professional to get it done with no budget blowouts – but make a list and stick to it.”

Andre: “Prepare your home so buyers can imagine it as their own. Aim to create an emotional attachment with the buyer. It might be a good idea to have a stylist for your property to achieve the desired results. ”

Contact local real estate agents

Here are Andre’s tips to get your property to sell:

  • Kerb appeal: Make sure there are no weeds and the lawn and plants are trimmed. Attractive pot plants can also add to the appeal.
  • Lighting: Clean the inside and outside of your windows, turn on all the lights and draw up the blinds and curtains.
  • Less is more: Less clutter will help the room look bigger so the potential purchaser can imagine their things fitting into your property.
  • Pleasant scents: Get rid of any smoke or pet odours. Open up your windows, brew coffee or use diffusers to add some homeliness to your property.
  • Acclimatisation: This is largely weather dependent but if it’s cold turn on the heater and if it’s hot, turn on the air conditioning to create an enjoyable experience.
Source: Tattersalls Real Estate

What’s next for the Sydney and Melbourne property market?

Thomas:  “The RBA has lowered interest rates further and have increased the restrictions on loans for investment properties but the thing is, investors don’t set rental prices just as vendors don’t set sale prices. The market will take care of that, demand will always win out and people can only afford what they can afford. Once again, this may be the beginning of the end of the boom market, if this happens.”

Andre Pang: “The market is expected to plateau and move sideways for a number of years. Investors should seek high yields instead of growth at this moment. I also see an increase in studio developments like the ‘Melbourne Quarter’ project in Docklands which offers micro studios ranging between 25-33 sqm. While there is still an undersupply of property, affordability is still a major issue and studio apartments are very normal in other parts of the world, it’s only a matter of time that Sydney and Melbourne will adopt a similar mentality.”

Categories
Real estate & moving

10 things to know before buying your first investment property

Property investment can be a very lucrative business. You chosen a dream investment property, got an approval for a loan or opted for a contract for deed, but is it the right decision? There are numerous examples of people making significant gains and profits through a real estate portfolio. But it can also be a highly risky use of your money. And regardless of the size or type of property, your plan to invest in it will almost certainly require a substantial initial and ongoing spend. That’s why it’s essential to take additional care when investing in property to ensure you minimise your risks as much as possible, protecting your hard-earned cash.

Here are a few things you should know and consider before investing your money in the real estate market.

1. The price is right

Any real estate investment aims to grow your capital through the increase in the value of your property. Central to this is selecting the right property at the right price. But it’s not always clear cut. A cheap property may have tremendous growth potential, but it may also be in an area when the market is merely affordable. Likewise, a high-end property may hold its value, but it also may not offer much growth.

2. Ensure you have the money to support the investment

Property investment can be very lucrative, but the gains are usually measured over the long-term. You don’t want to be forced to sell a valuable property early because you don’t have the capital to support it. Before making any investment carefully consider the short and long-term running expenses to ensure your budget can handle it. When reviewing your financial status and capability to fund any expenses for your future investment property, be mindful of any remaining personal loans you may have, as they may affect the amount the bank will allow you to borrow.

Source: Buildtech Homes

3. Seek help you can rely on

Turning a profit from an investment property can, at times, be a full-time job. A property manager can help ease the burden doing everything from managing the day-to-day issues to helping you select new tenants and reviewing rental costs. The best thing is they are usually paid as a percentage of rent collected, so if you’re not making any money, they won’t cost you any.

4. Study the market

Real estate markets are often operating in a microcosm with prices on one side of a street being slightly higher than the other, for instance. When looking to maximise returns, every little edge, you can get matters, so it’s important to study your rental market carefully before you buy. You can start researching online, but local knowledge is hard to beat.

5. Select the right mortgage

There are a variety of different mortgage and financing options available when it comes to buying properties. Finding the right model is not always as simple as selecting the cheapest one as the way the financing is structured can affect tax deductions. Consider all the options and your circumstances to find the best financing deal in the long run for your investment.

6. Leverage equity

If you already have existing properties, then leveraging the value tied up in them can be an excellent way to fund further investments. If you have a $500,000 property with only $100,000 left on the mortgage, then you have $400,000 equity you can leverage. Leveraging an existing property also opens up the possibility to leverage against the investment property further down the line and has potential tax benefits.

7. Negative gearing

Negative gearing allows you to claim tax relief if the investment amount is larger than its income returns. This can enable you to make a technical loss on the investment property while creating an overall profit by offsetting other taxable income. Negative gearing isn’t a good reason on its own to buy an investment property, but it can help with structuring your finances and budgets.

8. Limit unexpected surprises

Unexpected surprises can be catastrophic for an investment property. A sudden large spend on maintenance work can make a massive dent into your finances. Limit your risk of being surprised by having the property professionally inspected before making any commitments.

Source: Constructive Building Consultants

9. An investment not a home

An investment property is a business, not a home. It’s important to keep this in mind when renovating and decorating. Everybody has unique tastes and styles, but an investment property has to be able to appeal to anybody. Simple and neutral tones are perfect as they are inoffensive and have wide appeal.

10. Long-term thinking

Property investment is not a short-term cash generator. Your property can often take years or decades to show the type of large profits you seek. The investment will usually require further spending and time commitments along the way. Keep this in mind when making your financial and life plans.