Reasons to Invest in Property
While there may be dips and plateaus, if you’re in property for the long term, it is generally considered an attractive investment strategy in Australia. So, here are some of the reasons why you might consider investing in property.
Positive and Negative Gearing
‘Negative gearing’ refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your other income like salary and wages.
This way you’ll pay less tax, but don’t be mistaken, it is still a loss that hopefully will be more than made up for by an increase in the property’s value over time.
Investment properties don’t have to be negatively geared. If the rent outweighs the costs of owning the property, it is said to be ‘positively geared’ and you can expect to pay tax on the profit the property generates each year. The benefit of a positively geared property is it can provide ongoing income and a capital gain if the property has increased in value by the time you sell it.
Tax Benefits of Property Investing
The tax man’s golden rule is that expenses relating to your property investment can normally only be claimed as a tax deduction for the period that your property is rented or available for rent.
Plenty of the ongoing costs of managing and maintaining an investment property can usually be claimed on tax including the interest paid on your investment home loan – but that’s not all.
If you need to take out a loan to make repairs or purchase a depreciating asset like an air conditioner for your rental place, you may also be able to claim the cost of interest on this loan.
Remember, it’s always a good idea to speak with a registered tax agent for tailored advice on what you can – and can’t – claim as a tax break in your particular circumstance.
Capital Growth vs. Cash Flow
When investors are searching for a property they often weigh up which strategy is right for their goals. Is chasing positive cash flow the best way, or is a capital growth strategy the better option to suit your situation?
Investing for Capital Growth
If the property you invest in increases in value over time – so that you buy at one price and then sell at a higher price - it delivers a profit to you. And that, in a nutshell, is capital growth.
However, capital gain should generally be considered a long-term benefit of property investing, not a quick win.
Investing for Cash Flow
On the other hand if you are investing with a cash flow strategy in mind you’ll be looking to invest in properties with high rental yield potential and a rental income that is higher than the total cost of the property to you.
Then you can decide what to do with any additional income after costs, such as maintenance and the mortgage repayments, such as potentially paying down the loan on the property and increase equity.
To find the right property, you should understand what rental yield is. Investors use rental yield as an indicator to compare properties, as high rental yield means more cash flow. Simply, rental yield measures the ongoing return on investment for a property through an equation that takes the income you generate from a property as a percentage of the property’s value.
To do the calculation and figure out gross rental yield you will need calculate annual rental income. First, take weekly rental income and multiply by 52 (weeks). Then divide this annual rental income by the property’s value (either the purchase price or market value) then multiply by 100.
There are many reasons for considering investing in property. If you’re thinking about investing, reach out to your local Aussie Broker who can help you find the right home loan to suit your needs.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment Properties by Dwelling Types
- Chapter Four : Finance for Your Investment Property Purchase
- Chapter Five : How to Invest in Property
- Chapter Six : Adding Value to Your Investment Property
- Chapter Seven : Positive and Negative Gearing
- Chapter Eight : Getting Your loan
- Chapter Nine : Selling your Investment Property