How property investment could work for you
Buying an investment property is one way people are looking to take control of their financial future. If you’re thinking about investing in property, it’s important to understand how property investment works, the potential benefits and the risks involved. Here are some of the things to consider before you get started.
Appeal of investing in property
If long term investment is something you are interested in, property investment could be an option. It could earn you income through tenants and capital growth – if it increases in value when you sell the property, the profit you make is called a capital gain.
You may also reduce the amount of tax you pay, by offsetting some investment property expenses you have incurred against your income. In addition, by building up equity over time you might use this equity to buy another property or renovate your existing one.
Potential risks of property investment
Any form of investment has some uncertainty, and borrowing to fund an investment property has an added level of risk to it. It’s always a good idea to do your homework to make sure your investment is the right strategy for your needs. Some of the most common property investment risks include the following:
Rental income – rental income is not always guaranteed. There may be times you have a longer gap between tenants due to unexpected repairs or market changes. It’s important to make sure you can repay any investment property loan you take out, in the event that it doesn’t perform as expected.
Market fluctuations – a rise in home loan interest rates or an underperforming market may affect the value of your property, your mortgage repayments, disposable income and your profit margin.
Negative gearing – Negative gearing is when the income you get from your investment property is less than the costs of owning the property. It’s usually used as an investment strategy as it can offer advantages like tax deductions, but negative gearing can also have significant disadvantages. It is a loss after all. We recommend you speak to your tax accountant or financial adviser to explore whether it is an appropriate strategy for you.
Capital gains tax - Capital gains tax (CGT) can also affect your profit margin when you sell your property – your profit will be included in your taxable income taxed at your marginal income tax rate. Speak with your tax accountant or financial adviser to see if you’re eligible for a CGT discount.
An alternative investment structure
A Self Managed Super Fund (SMSF) may sometimes be used to invest in a range of assets, including property, and is regulated by the Australia Tax Office. It is a DIY superannuation fund that can have up to four members, but the rules for setting them up and investing through them are complex and subject to change. The benefits can vary according to circumstances, so it’s important to speak to your tax accountant or financial adviser if you want to explore this strategy for your property investment.
Investment loans and how they work
Property investment loans allow you to borrow money to invest in land, houses, apartments or commercial property. These loans work a bit differently to a home loan for a property you intend to live in. As an investment in property may generate income for you, that income may be factored into your ability to pay back the loan. Interest rates are usually higher for investment home loans than home loans, as the risks for the lender are higher as well.
How to apply for an investment loan
Traditional lenders have strict eligibility criteria for investment loans. If you don’t meet the banks ending criteria because you’re self-employed or have previous credit issues, non-bank lenders may be able to help. Specialist lenders can help all sorts of people from those with irregular income - like the self employed, through to people who have previous credit issues.
The process for applying for an investment loan is simple. You should have a conversation with your trusted Mortgage Broker, so that they can understand your situation and find you the best possible lending solution for your individual circumstances.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.