Prior planning is the key to making money on property, especially if you’re a novice landlord.
Ask yourself ‘why?’
Residential property is a favourite among Australian investors but you need to be sure it’s right for you.
On the plus side, landlords often enjoy regular rent returns, long term capital gains and valuable tax breaks. However there are drawbacks. Property is generally regarded as a long term investment, so you need to be prepared to hold onto the place for around five to seven years. Throughout that time you’ll also need to keep clear accounting records to avoid receiving a ‘please explain’ from the tax man, and in addition, you have a legal obligation to maintain the property in a sound state.
Do the sums
Investing in property involves taking on a substantial loan, and if the rent doesn’t cover all the expenses of owning the place – meaning it is ‘negatively geared’ – you will need adequate other income to cover the balance.
Think about how you will manage the loan repayments during the inevitable periods when the property is vacant. It also makes sense to have a pool of spare cash to cover any unexpected costs like emergency repairs.
Unless you plan to manage the property yourself, factor the cost of professional property management into your budget. The fee can be around 7% of gross rent though this is usually negotiable.
Will your budget buy quality?
If your buying budget is small, and you’re buying at the absolute cheapest end of the market you run the risk of investing in a property that could deliver poor returns, or require significant work, or attract unreliable tenants. Always buy the best possible quality you can afford, and ask yourself if you’d happily live there. If the answer is ‘no’ chances are you could have difficulty letting the place.
Speak with your broker
Applying for an investment loan is a similar process to applying for a home loan however there are some differences. Most notably the rent the property generates will be taken into account by lenders when assessing how much you can comfortably afford to repay.
You may also have additional considerations as a landlord. For instance, interest only loans are popular among investors, and with a fixed rate loan you may be able to claim up to a year’s worth of prepaid interest as a tax deduction. Your tax adviser can provide details for your circumstances.
The key is to discuss your borrowing needs with your Aussie broker who can help you select the investment loan that is most appropriate for your needs.