Finding an investment property that ticks all the boxes – good returns, tax-effective, potential for growth – requires some careful assessment and thorough analysis. Here are a few characteristics to look out for as you embark on your search.
Good rental yield
Rental yield is the net annual return on the money you’ve invested; i.e. the rent you receive in a year, less all the outgoings (maintenance, council and water rates, agents fees, strata levies etc), expressed as a percentage of the purchase price of the property.
According to a February 2010 National News Release from RPData, the national gross rental yield for houses dropped from 4.7 per cent in January 2009 to 4.2 per cent in January 2010. Over the same period, yields for units fell from 5.3 per cent to 4.9 per cent. But Tim Lawless, National Research Director at RPData says the outlook is strong.
“With rental demand likely to be higher during 2010 due to continuing strong migration and fewer first home buyers, we anticipate that rents and consequently yields, will improve over the year,” says Lawless.
“[Yields] will vary by region,” says Matthew Bell, economist at Australian Property Monitors. “The regional ones have generally stronger yields in the more affordable areas.” Bell explains that those affordable areas will typically represent lower capital growth when compared to inner city areas, where yields may be lower.
Tyron Hyde, CEO of Washington Brown warns that if yields look like they’re too good to be true, they may be just that. “If you’re getting property that’s over 10 per cent yield, there’s a reason why generally,” he says. He cites mining towns as an example of high yield, high risk areas as the long-term future of the economy of the region may be unstable.
The highest rental asking price does not mean money in the bank. If the property is not tenanted, it’s not earning. For each location in your search, carefully examine the vacancy rates in the area – both now and historically. Look at current stock on the market, as well as potential stock, such as large apartment developments in the pipeline. If there’s a flood of new properties coming onto the market in an area, vacancies could get high very fast. Talk to local real estate agents about tenancy trends as well as developments in the area and visit www.sqmresearch.com.au for vacancy trends by postcode and region.
“An investor wants a property which has got good asset appreciation appeal, [as well as] a good yield,” says John Symond, Executive Chairman of Aussie. But Symond says that even though an investor is not going to live in the property, they still need to consider features that appeal to owner-occupiers, such as proximity to schools and transport.
“When the investor comes to sell the property, you want the property to appeal to both owner-occupiers as well as investors so really an investor has got to do even more homework.”
According to the RPData National News Release, national dwelling values were up 11.8 per cent throughout 2009. January saw an increase in values of 1.8 per cent and Lawless says that the year has started with some confidence. “Whilst new stock has been increasing rapidly, the total number of properties available for sale has been falling which is an indicator that buyers are for the time being outweighing sellers and new supply is being quickly consumed.”
To maximise your property’s capital growth potential, assess the level of supply of housing in the area, whether there is opportunity to add value to the property, its proximity to key infrastructure, and the local council’s plans for the area in the future. Importantly, some careful research of other local properties as well as a professional valuation can help you ensure that you’re not paying too much for the property to begin with.
A significant benefit to a tax-paying investor is the potential for tax deductions. Depreciation – or wear and tear – on an investment property can be offset against your taxable income.
“All properties depreciate, some more than others,” says Hyde. “Newer properties generally have the highest depreciation allowances.”
Hyde explains that for properties built after July 1985, an investor can make a claim on the depreciation of both the structural elements of the property, as well as the internal plant and equipment (fixtures, flooring, appliances etc). For properties built before July 1985, only plant and equipment depreciation allowances apply.
Structural depreciation allowances apply for 40 years from the time the building was constructed. As for plant and equipment, that depends on the item and its age. “If it’s a brand new oven, the ATO says you can claim it over 10 years,” says Hyde.
Hyde says that improvements made to the property can translate to tax deductions too.
“When you go and renovate, those items start from scratch,” he says. “So if you put a new kitchen into a 1980 house, the new kitchen qualifies as a new capital works deduction and it will start depreciating for 40 years from the time that you installed it.”
Hyde says that property selection should not be based on its depreciation allowance. Rather, once the property that suits an investor’s goals is purchased, then the investor needs to ensure that they are maximizing their tax benefits.
For depreciation on your property to qualify as a tax deduction, it will need to be evaluated by a quantity surveyor. “It’s the only form of allowance as a property investor that is open to subjectivity, interpretation and skill,” says Hyde.
Low maintenance, high quality
As with any good investment, you need minimal costs eating into your profits. Unit blocks with facilities such as pools and elevators, while appealing to a wider group of tenants, will usually entail higher strata levies. If they don’t, then there’s a risk of the body corporate needing to raise urgent funds when they need repairs.
“Those costs can get very out of hand, especially if you’re not living in the property,” says Bell. If you’re after a ‘set and forget’ investment, look for something low maintenance and well looked-after with strata levies that are appropriately priced.
A good fit with your strategy
When conducting your search for the right investment property, it’s important to keep your goals and your investment term in mind and stick to your guns. Ask your accountant if he or she has a working spreadsheet that you can use – or make your own with their guidance – to accurately compare properties in your search, and make sure the one you select ticks all those boxes.