Before jumping into the responsibility of managing a rental property, make sure that you’ve gotten some advice from the financial experts at Nitschke Nancarrow.
Benefits of an Investment Property
An investment property in not something you buy because you plan to live in it. Rather, it is utilised and maintained as a source of income. In the short-term, rental returns are used to help pay back the loan. In the long-run, capital gains from the investment will contribute towards wealth and financial security.
However, investing in property to rent comes with some inherent risks. With adequate planning, you can avoid these pitfalls.
Take a moment to review the following information as you plan your next investment.
Think About How Much You Can Afford to Borrow
The best way to determine what’s reasonable for you is to talk with a mortgage broker. Additionally, it’s helpful to know that banks typically consider only 80% of the rental income when determining whether or not you can afford an investment loan.
Ensure That the Price is Right
Paying too much for a property could make your rental returns insufficient to cover loan repayments. Find the ‘right’ price by:
– Researching the area of interest
– Purchasing in an area you are familiar with
– Monitoring the market for some time
– Arranging a valuation on the property before entering a contract
Carefully Examine the Property’s Condition
Assess your prospective property with a professional inspection. If the property is not in peak condition, you can still increase its value and the potential rental income by fixing it up. Even so, a careful inspection will help you to avoid any unpleasant surprises down the road!
Consider Prospective Renters
Is the property you are considering something that will appeal to prospective renters? Renters often look for a place situated near public transportation, schools, shops, universities, and the like. Think of the needs and interests of the renter demographic in your area.
For example, an area with lots of good schools means that there will be a lot of families looking for a home with a backyard where children can play. Property near a university should pander to the interests of university students who don’t want the maintenance of a backyard. Rather, they’d likely prefer something with lots of bedrooms so that they can share the house with friends.
Anticipate Cash Flow
Thorough calculation in advance will help you determine whether you can afford the property. Try to weigh your expected income in comparison to the expenses the property will incur. How much do you think you’ll need to invest every year. Think too about how viable you expect the investment will be in the long term.
There are other costs to consider beyond repair and maintenance. What expenses should you anticipate?
– Interest rates
– Land tax
– Agent fees
Is the property negatively geared? Negatively geared means that the expenses of the property exceed its expected income. This may sound bad, but it can be a potential tax advantage so don’t overlook the possibility.
Keep in mind that if the sale price exceeds the purchase price, then capital gains tax will apply to the sale of the property. To fully understand the tax implications of owning a rental property, it’s best to speak with your accountant.
Finance with the Right Mortgage
When it comes to financing your investment property, the following tips can help you:
– Keep your home loan and investment property separate
– Interest on your investment property loan is generally tax deductible
– Look at the difference between fixed and variable rates
– Set up your loan as interest only to increase the tax effectiveness of the investment
– Consider whether or not to use equity from another property
– Talk to your mortgage broker to find your best option
An investment property is a long-term commitment, so you have to be prepared to stick with it. It can take some time to see results. Property values typically don’t change overnight, so patience is key. No two situations are exactly alike. Research is essential to making an investment that is just right for your circumstances.
Seek professional advice any time you have questions or concerns about investing in a rental property.
Nitschke Nancarrow can help you make sure everything is in order before you buy an investment property. Find out how when you call our Adelaide office on (08) 8379 8950 or send me an email.
-Kym NitschkeTags: Accounting, Adelaide, Australian Tax Office, investment property, rental property, South Australia, Tax