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Investors have long been lured by the property market, hungry for capital gains and regular rental income.
The prospects for capital gain are good if you buy in well-located areas where the demand for property is likely to be high in the future. This is true of investing in houses or units.
With a few expert tips, you can build your wealth through property investing.
The good news is that the taxman will let you write off some of your expenses, but he is checking the fine detail so make sure all your expenses are legitimate. An accountant can help with this; otherwise the ATO website is a great source of information.
Going for capital gain
In going for good capital gains, several basic objectives should guide you. Over the long term, about 60 to 80 per cent of returns from residential property are derived from gains in the value of property, rather than rental income, so that should be your focus in buying a property.
If you buy well, you’ll reap the rewards. Property is expected to deliver good returns to investors because it is underpinned by positive fundamentals such as economic and population growth which are trending upwards. This ensures future strong demand for housing.
Location, location
Buyers should look for a combination of factors that would make a property a good investment, including buying real estate in a quality location with good population growth and attractions that ensure future strong demand.
Key locations include suburbs close to water or the city, suburbs with good amenities like shops, public transport, parks and libraries and good public infrastructure like good roads and bridges.
The more of that mixture that you get, the better off you will be in the long term. So remember, the aim is to buy the worst house on the best street rather than the best house in the worst street, where nobody but you may want to live.
If you can’t afford the more expensive areas by the water or those near the city, try buying into surrounding suburbs. But don’t go too far out. Experts say that the smaller the city, the closer to the CBD you should be to ensure ongoing demand from renters.
Houses v units
On whether to buy a house or unit, houses generally gain in value faster than units because they sit on land, which is scarce.
Units, however, generally yield more in rent than houses and could be a more affordable way to start building a property portfolio.
The difference between the two is merging in most capital cities because of high housing unaffordability and the trend towards medium-density housing, underpinning unit demand.
Units should be bought only in small blocks and be well located within a building. High-rise buildings or apartment complexes with more than about 20 units or apartments should be avoided because they aren’t unique and there are so many of them it may put off future buyers. As we are a car-loving nation, a parking spot is ideal.
Help from the taxman
Investors can claim tax deductions for expenses incurred in running and owning an investment property while the property is rented or available for rent. The biggest deduction by far is for borrowing costs, and the taxman is glad to help you with this. You can write this expense off at your marginal tax rate.
Other costs associated with earning rental income may be deductible, such as insurance, strata fees, repairs, council rates, land tax and property management fees.
People can’t claim tax deductions for the costs of buying or selling a rental property, such as stamp duty, which is instead added to the cost base of the property for capital gains tax purposes.
Investors often negatively gear investment properties (run them at a loss to be set against other income). However, successive cuts in marginal tax rates in recent years and the lifting of thresholds at which higher tax rates kick in are making negative gearing less attractive.
Don’t forget depreciation
Residential investors can write off two kinds of building-related costs: capital works deductions for the construction cost of buildings built after July 1985 and depreciation for wear and tear of fixtures and fittings within the property.
Investors will generally need to engage a quantity surveyor to draw up a depreciation schedule, which outlines the allowable level of deductions. When investors sell property, they might have to pay capital gains tax.
If an investor has owned a property for more than 12 months, they might be able to cut their CGT by accessing the 50 per cent discount.
The tax office is watching
It is important not to be overly optimistic about tax breaks. The ATO is targeting individuals who over-claim deductions and understate income and capital gains on investment properties.
The ATO is using land-tax data from state revenue offices to identify individuals who own investment properties, holiday houses or units, and check that they have declared rental income in their returns. So get good advice from your accountant before putting in your tax return.
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