What pulls people towards investing in a property are the benefits of doing so – regular rental income, tax benefits and ever increasing value in the long term. However, it must not be ignored that getting a loan for an investment property is considered riskier by the lenders (or banks). The sources of this increased risk go from defaulting as a landlord, tenants destroying your property, not having tenants at all to over extending yourself. Hence, convincing the lenders becomes harder.
Also, an increased risk means a higher interest rate on the loan, a higher down payment, and going through stricter loan issuing standards.
Therefore, to reap the desired rewards from your investment, dedicate substantial time towards landing the right home loan.
Common Features to look for in a property
- Quiet street and safe neighborhood
- Good lighting on street
- Home security system if desirable
- Storage/ Cupboards for bigger families
- Off street or undercover parking as per the type of property
- Low maintenance garden for growing families
- A pleasing outlook
- Accessible location
- Well connected to public transport
- Close to lifestyle and public amenities
- Area of high rental demands and returns
Better suited loan types
Fixed rate loans
- Since, the interest charged annually can be calculated upfront and pre-paid each year. This lends you the ability to claim this amount as a tax deduction.
- This can even out your tax bill for the past years where income from other sources was higher than normal.
Interest only loans
- Here, you will have to pay only the interest on the loan and no repayment of the principal.
- The principal will be paid at the time of selling the property.
- Additionally, all your repayments are tax deductible.
- For serial property investors, this is a very lucrative option. However, it must be kept in mind that most lenders offer this option only for a limited period (~5 years).
Line of credit
- This loan will allow you to withdraw cash from your loan up to a certain limit as and when you need.
- In line of credit loan, your loan balance gets reduced by the cash coming in and increased by cash going out.
- This loan is best suited for an experienced investor as there are no set repayments and a certain level of cash management discipline is required.
If you decide to sell
If you decide to sell your investment property then, you need to pay Capital Gains Tax (CGT), which is a tax paid on the difference between the selling and purchase price of the property, which can include:
- amount paid for the property
- legal fees
- stamp duty
- other upfront costs
- cost of renovations done by you.
The Tax Office calculates CGT from the date you entered the contract as the date of purchase, and not the settlement date. So, you must maintain a strict calendar about every detail. Also, properties purchased after October 1999 which have been owned for a period of 12 months, may stand eligible for a discount of up to 50% on CGT depending on the ownership structure of the property.
For such reasons, CGT calculations have a tendency to get complicated and thus, a credit advisor must be consulted to avert any undesirable situation.
Tax deductions you can claim
You can claim two types of depreciations – depreciation on fittings and fixtures and depreciation on the building itself. Buildings constructed between 1985 and 1987, depreciate by 4% annually, while those constructed after 1987 depreciate at 2.5% annually.
Depreciation is one area where it pays to get professional assistance. With a quantity surveyor you can be assured that the property will be properly inspected. He will also draft a complete depreciation schedule ensuring that nothing is missed out on depreciation deductions and nothing is overstated in your claim, which could cost you tax penalties.
When your property generates less rental income annually than your yearly mortgage repayment amount, it is called to be a negative gearing property. This is a taxable loss which means that you can get the negative amount deducted from your tax returns by showing a loss. This is called PAYG Withholding Variation. However, it must be done with caution, because a loss, though it may provide some short term benefit, is a loss in the long run.
Minimizing the risk of negative gearing:
- Choose a property that is in a good location with premiere amenities available closely. This will ensure that your property is never out of tenants.
- Manage your income well enough to pay off all the expenses of maintaining the investment property.
- Get your mortgage insured to protect yourself from any unforeseen circumstances.
When your property generates more rental income annually than your yearly mortgage repayment, it is called to be a positive gearing property. This is a taxable profit and you, as a landlord, need to set aside some amount to be paid as taxes of owning that property.