Here’s why property investment might be right for you
Property can be an attractive investment if you’re in it for the long haul. There are plenty of reasons why you might consider investing.
Negative gearing refers to when you have borrowed to invest, and the costs of owning that investment property are higher than the rental income.
The difference, which is a loss, can normally be offset against other income like salary and wages. This means you may pay less income tax. It’s still a loss though — but one that will hopefully be compensated for by a rise in the property’s value over time.
Investment properties don’t have to be negatively geared. Positive gearing is when the rent is more than the costs to own the property. You can expect to pay tax on the profit the property generates (if your total income including that generated by the property is greater than the tax-free threshold). A positively geared property may provide ongoing income as well as a capital gain if its value rises by the time you sell.
Your property investment’s expenses are usually only deducted from your taxes when your property is rented or available for rent.
The ongoing costs to manage and maintain your investment property are usually tax deductions. This includes the interest paid on the loan, insurance, maintenance and repairs, agents fees and depreciation on assets that will decline in value over time, such as air conditioners or stoves. It’s always a good idea to talk to a tax professional for advice around what you can and can’t claim.
It’s important to weigh up a few different strategies to decide what is right for you. One option is to look for properties which could make a profit as soon as you buy. Or alternatively, you might look for properties which could increase in value over time.
Capital growth means your property’s value rises over time. You buy at one price and sell at a higher price to make a profit. But capital gains could generally be considered a long-term benefit of property investing, not a quick win. You may also need to pay capital gains tax on the profit you have made.
One cash flow strategy is to invest in a property with rent higher than the ongoing cost to own the investment.
You can decide what to do with any additional income after costs, such as pay for maintenance or pay down the loan on the property to increase equity.
A higher rental yield means more cash flow. So weighing up the rental yield of different properties is one way to compare them. Rental yield indicates the ongoing return on investment for a property by measuring the income generated from the property as a percentage of its value.
To calculate gross rental yield, first take the 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) and finally multiply by 100.
There are many reasons to consider investing in property. If you’re thinking about investing, your local Aussie Broker can help you find the right home loan to suit your needs.