"Australians used to dream of a quarter-acre block to call home. Today, those in the know are making money by buying an investment property rather than a place of their own."
"You don't have to be wealthy to have an investment property, but you do need to do your homework and apply your finances wisely," says Vicki Hood, product manager of residential investment loans at ANZ bank.
So let's consider some frequently asked questions:
Why should I buy an investment property?
"People invest in property because it's tangible and offers good returns," Hood says. "Property is easier for some people to invest in than shares, because you can see it and feel it. If you already own a home, you know what was involved in buying it, so it won't require a quantum leap to commit to an investment property." Rental returns and negative gearing will also help pay off your loan.
What should I look for?
The best thing to do is put yourself in the renters' shoes. Proximity to transport, the number of bedrooms and the availability of off-street parking are important. And if you wouldn't pay rent for a place with mission-brown carpet, chances are potential renters won't either.
How do I finance the loan?
Real estate agents generally require a 10 per cent deposit to confirm your offer on a property. The amount of deposit the bank requires will depend on your financial situation. In some circumstances, banks and other financial institutions may lend up to 95 per cent. Talk to a few banks and mortgage brokers and explore fixed or variable-interest-rate options.
Is it easier if I already own a property?
There's a growing trend for young people to buy a home or apartment to live in, pay off part of the loan and borrow against their equity to finance the deposit on an investment property. Equity is the proportion of the house you own. "The bank can finance 110 per cent of the investment property, using the home as top-up security," Vicki says. "Depending on its value, you'll need to own roughly half of your current property to get the 110 per cent."
What does negative gearing mean?
Negative gearing comes into play when you borrow money to buy an investment, but the expenses are greater than the income it generates. If rates, bank fees, insurance and interest on the loan for your investment property add up to more than the rental income, you should be able to claim the difference as a tax deduction. For example, if your expenses for the year amount to $12,000 but you only receive $10,000 in rent, your $2000 loss can be claimed as a deduction. It's always best to run through the details with an accountant or tax adviser.
Are there any hidden catches?
While many buyers of investment properties have little trouble getting a loan, they often forget to factor in extra costs such as bank fees and mortgage insurance, which can add another $10,000 to the amount borrowed. You should research the extra costs and calculate how much you'll have to spend on the property each week. Ask the real estate agent what the rates on the property are, and don't forget there may be periods when the property's not rented.
How do I know how much rent to charge?
"As a general rule you should expect to get between five and six per cent of the property's capital value back every year," says Steven Leech from McGrath Partner Estate Agents. So if the property is worth $220,000 you would hope to receive at least $11,000 a year, which is roughly $210 a week. "It all depends on demand and how many other similar properties are on the market for the same price," Steven says. Check out your local newspaper to get an idea of the going rate.
I don't understand capital gains tax.
The profit obtained when selling an asset is subject to capital gains tax. Some items, such as your primary residence or motor vehicle, are exempt. But when you sell an investment property, if its value has gone up, you'll have to pay capital gains tax on the difference. The amount will be added to your regular income and you'll be taxed at your marginal tax rate.