Why You Should Consider Buying an Investment Property
If you're thinking about buying property, you're in good company. Owning property is part of the Australian dream, not just for a place to live but as a key investment. With the value of Australia’s property market soaring to $6.7 trillion, property investment is well ahead of shares and superannuation as the preferred way to build wealth. The past decade has seen housing prices grow by 41.8% nationally, making property an attractive option for both capital growth and rental income.
Who Invests in Property?
Many investors are everyday Australians, often purchasing their first home and then a second property for investment. In 2016, CoreLogic estimated that 2.6 million investor-owned properties were valued at $1.37 trillion across Australia. In fact, about 35% of all residential loans issued in September last year were for investment properties. This shows that Australians have a strong appetite for property investment, especially compared to other countries like the UK, where investment loans make up only 14% of new lending.
Understanding Investment Properties
An investment property is one purchased with the goal of earning a return, either through rental income, appreciation, or both. Generally, any property not used as your main residence is considered an investment property. If you decide to live in it, it becomes an owner-occupied property, and certain tax benefits no longer apply.
Buying an investment property involves similar steps to buying a home, but lenders have stricter criteria and may charge higher interest rates on investment loans. You’ll also need to consider the area and property type carefully to ensure good rental returns or yield.
Financing Your Investment Property
Many investors use the equity in an existing property as a deposit for their next investment, allowing them to avoid paying Lender’s mortgage insurance (LMI) if they can cover at least 20% of the purchase price. LMI protects the lender if you default on the loan, and borrowers who pay less than a 20% deposit generally incur a one-time LMI fee.
When you buy an investment property, you’ll want to be mindful of the tax implications, especially if you live in the property for any period. Doing so may affect your tax deductions on expenses like repairs and maintenance, as it may no longer qualify as an investment property.
Maximizing Tax Deductions
The Australian Tax Office (ATO) allows property investors to claim various expenses, such as:
Additionally, purchasing a depreciating asset, like an air conditioner, or undertaking renovations can be tax-deductible if the property is rented or intended for rent.
For those who renovate and sell properties as a business, the profit or loss is treated as income rather than a capital gain. However, renovations on long-held investment properties fall under capital gains tax (CGT) when sold.
Legal and Travel Expenses
Some legal costs aren’t deductible as income but can count toward the property’s cost base for CGT calculations. Travel expenses related to managing your investment property are generally no longer deductible unless you’re operating a property investing business or own an excluded entity, like a corporate tax entity.
Negative Gearing and Positive Cash Flow
Negative gearing occurs when your property’s expenses exceed its rental income. Investors can claim this net loss as a tax deduction, which can be beneficial if the property appreciates over time. Conversely, if your rental income exceeds expenses, you may face tax on this positive cash flow.
Capital Gains Tax (CGT)
When you sell an investment property, CGT applies to any profit made. Holding the property for more than a year allows for a 50% discount on the capital gain. Keeping detailed records of expenses such as stamp duty, professional fees, and renovation costs is essential, as they can reduce your CGT liability.
This general information aims to provide an overview, but always seek professional advice for your specific financial situation.
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