A must read guide for astute property investors
Buying your first investment property can feel quite stressful and overwhelming. As part of our service, we support you along your investment journey. We have put together a list of key items to tick off when purchasing an investment property for the first time.
Investing without a long-term investment strategy is one of the most common mistakes made by property investors, leaving real estate owners with underperforming assets and with lesser results than expected. Even worse, without a plan investors often end up with an inappropriate asset that doesn’t contribute to an overall goal.
When considering the overall investment goal, property investors should consider the following:
• Why am I investing in property? (For many this may be ‘financial freedom’ or to be able to retire comfortably)
• In what time period do I want to achieve this?
• What will succeeding with this goal look like? (Consider numerical figures – how much money do you need for what you’d like to do? Bear in mind how far in the future this will be and the relative value of the funds.)
• How many properties and what type of growth do I need to be able to achieve this?
By keeping in mind the potential for solid growth rates and an understanding of whether you will accept a loss now for a future capital gain, or whether you’re aiming to live off of the cash flow, this should quickly explain to you at least the basics of your investing plan.
For many, it seems natural to purchase a property in their own name, however this isn’t actually the only option available. In fact, not considering the structure and its implications prior to purchase can cause you substantial difficulty and expense later in your investment portfolio.
If you’re looking to minimise your tax and to protect your assets, then you may want to consider purchasing in a company or trust structure. You may also hear of this being called the “investment structure”. As companies are taxed 30% on their profits, while individuals are taxed at their income rate, which will likely be higher than 30% for a lot of investors.
When estate planning, you must speak to your accountant to ensure you don’t structure your asset purchases inappropriately. This is particularly important if your investment goal is to pass the assets along to your children, as trusts can be particularly handy as you would be able to avoid transfer costs later in your life.
Consider the following structures, in consultation with your accountant and/or legal advisors:
Structuring your loans in a way that is mismatched to your strategy can be detrimental to your investment portfolio. Flexibility and tax are two crucial aspects to look at when considering your finance options. If you need to refinance with little notice to get into another investment that has come up, you could find yourself missing out on the opportunity all together and not being able to expand your portfolio.
While ‘cross collateralising’ may work for some investors, others will find that if they want to go and take out equity to borrow more than 80% for an investment property, and your loans are crossed, then you may be charged Lenders Mortgage Insurance (LMI) on all of the loans. This is an amount that costs thousands of dollars and could be avoided with some upfront due diligence and a simple conversation with a mortgage broker or your bank.
An offset account, which is an account linked to your mortgage, allows you to put all of your available funds into the account and reduce your mortgage repayments. You can withdraw from it as you like, however you can keep all your savings in it to reduce and shorten your loan. This can save you thousands of dollars in the long run.
Some investors deposit their salary each pay day into their offset account, and then deduct their bills and expenses, ultimately using it as a transaction account. Not using an offset account, or not considering it as an option, could leave you missing out on valuable savings.
Before you lease your investment property, you must have landlord insurance set in place. A trap for many first time investors is thinking that landlord insurance is an unnecessary cost during their ownership of the property.
Landlord insurance is essential in protecting both yourself and your property from a range of possible risks. It is always better to be prepared for unforeseen circumstances that could dramatically set you back in your investing journey. An investment property is an important financial asset and protecting its value is vital to your success as a property investor.
Costs and level of cover vary from policy to policy, so take care reviewing each policy to ensure they meet your needs.
Some of the items which to consider when selecting your landlords policy include:
Do you know what you’re allowed to claim on your tax return as an investment property owner? If not, it’s time to talk to your accountant and find out. Often, due to lack of knowledge and sometimes a lack of organisation, landlords can forget about some of the easiest ways to ease the financial costs of holding an investment property, particularly a negatively geared investment.
From depreciation schedules, and updating them when a renovation has occurred, to education materials, there are a number of things that can be claimed. Speak to your accountant and save copies of every receipt for related expenses. You may also be able to claim for pre-paid interest up to 12 months in advance. This can be especially beneficial if you are on a higher income for the current financial year and expect to see a drop in the subsequent financial period.
In most cases it is worth having a depreciation schedule completed on your investment property. While older properties arguably have less of a depreciation benefit than newer properties, there is usually still a substantial amount you are able to claim – particularly if you have undertaken recent renovations or updates. Most companies that provide tax depreciation schedules will provide an estimate on the total tax savings the report will provide before they charge you a fee.
Depending on the age of the investment properties you are considering or have purchased, you may be able to add significant value by completing a cosmetic renovation. Small cosmetic renovations won’t require a building permit, so you the process won’t be delayed waiting on your local council to issue the permit.
Chat to your accountant or a quantity surveyor about what the tax savings would be on completing a renovation at your investment property. The tax savings may make undertaking a cosmetic renovation prior to leasing the property, worth the cost.
There are many other benefits of undertaking a renovation.
Some of these benefits include:
Whatever the reason you choose to renovate your property, it is important to ensure you use hardwearing and durable products.
Many investors look to a cheap, quick renovation. However, this is usually done with a ‘flip’ in mind and a profit from selling the property quickly after purchasing. Instead, those who renovate with a long-term strategy in mind by leasing the property to quality tenants should look for durable, reliable materials that are practical as well as visibly appealing.
For instance, it would be worthwhile considering the following:
Your property manager is your most valuable asset as a real estate investor. Selecting a highly experienced property manager with also property investment experience is essential. Having a manager who knows how to maximise the returns of your property over the long-term, can. be the difference of thousands of dollars in profit over the course of your ownership.
When ‘interviewing’ a property manager, it is important to ask questions about how the property will be managed, rather than the management fees, because most of the time a property manager will charge a fee that is reflective of the value they provide to the investor. Making sure both yourself and your management team are on the same page is crucial to a successful business relationship. When a property manager and the investor work towards the investors long-term goals, it allows the property manager to work effectively on behalf of the investor to maximise the total returns.
If you would like to have a discussion with our property management team to find out how we can assist you with managing your property/s, please visit our website to get in contact.