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Why would you buy an Investment Property?

By | Knowledge

Typically over a period of time the value of property increases: this is referred to as ‘capital gain’. By selecting an area that meets core criteria the potential and percentage increase of this capital gain is higher.

If you can service the debt (make the repayments and pay the costs) then this is like a forced savings plan.

Most people who own their own home for a number of years have been able to pay the loan repayments and the value of their home has increased. By doing this over a period of time they develop ‘wealth’ which can be referred to as ‘equity in their home’. The median house price in Sydney has grown from $505,000 in 2008 to $980,000 in 2018, which means after 10 years Sydney homeowners may have generated half a million dollars in equity. Most of these people would immediately tell you that they would not have been able to save half a million dollars any other way over that same time period!

The reason to buy an investment property include:

When the value of the investment property rises

Typically over a 10 year period in Australia most properties double in value: you can look at every suburb and you can get capital yield figures over the last 50 or more years. Naturally the rate of growth varies and you can research and pick areas which are statistically likely to increase more than other areas. If the property value increases and you have serviced the debt over that time, then you have generated wealth.

Investment properties provide tax advantages

  • Costs of having an investment property can be offset against the income from rent and from your personal income. A tax agent should forecast the possible benefits for you. But they will exist;
  • You are allowed to apply the relevant tax depreciation schedule to both the property (house) and the inclusions in the house (installed appliances) which can provide you an improved tax position;
  • The level of gearing will effect both serviceability and tax positions.

Rent is income

The rental is income, just like an employer paying you. Having a portfolio of properties creates a passive income stream.

A ‘Plan B’ for paying off your residential mortgage

When you do your math and work out how long it will take you to pay off your mortgage, then you may be looking at a non-favourable mathematical equation; you may need to work longer than you had planned initially! An Investment property could provide a way of selling that Ip in the future and using the funds to pay out your residential mortgage.

A ‘Plan C’ for having a retirement income or nest egg

By applying the same reasons, an additional IP can be retained by you through retirement years, allowing you to retire earlier, because you can use the IP as an income stream. If you were clever enough to develop a portfolio of IPs then you can live off the income stream, or sell them as you see fit to achieve financial objectives in later years.

Help your family by creating financial options for them or guaranteeing

You may be able to establish a personal financial position where you can later use equity in IPs to be able to assist family members like your children when they what to buy their first homes.

Unit or House & Land Packages: 4 Key Strategic Investment Differences

By | Knowledge

When considering an investment property it often stems from feeling or hearing that ‘investing in property can be a good idea’. Maybe it’s going to be your first investment property? Maybe you already have an investment property?

Either way it should be a STRATEGY to achieve key family, personal or financial goals. Any strategy has specific purposes: so you do need to understand yours: what are you trying to “get” from having an investment property?
  • I need to build wealth, because I cannot get ahead doing what I’m doing
  • I’m paying too much tax: all the normal PAYG; is there a way to save tax and how do I do it?
  • I have some equity in my family home and I need to know options?
  • I don’t really understand ‘good’ verses ‘bad debt’: which is a credit card and which is an investment property?
  • Why does an investment property help and exactly what does it do for me?

1. DIFFERENCES in COSTS ASSOCIATED on an ongoing basis

Units will typically have some common cost elements because you will be owning a part of a grouped structure, which has current and potential ongoing groups costs and reporting requirements. These typically are grouped into a category referred to as Strata Costs and Strata obligations. There will be a predictable element to this that you can factor in and a possible (random) element depending on the age of the units and the existing strategies of the structured decision group.

This category of cost does not apply if you buy a House & Land Package

2. DIFFERENCES IN SALES TAX

Because sales tax is calculated on the first contract, this means:

  • In the case of a unit you will be required to pay sales tax multiplied by the purchase price of the unit. It should also be noted that the sales tax component is typically not able to be financed, so you need to have the deposit available plus the sales tax component;
  • In the case of a new House & Land Package, you will only need to pay sales tax on the land value, which represents a considerable up front saving;
  • In the case of second hand property of either type or an already built new house, you will need to pay sales tax multiplied by the purchase price. Because the sales tax is only paid on the land value with the purchase of a House & Land package, this may also help an investor with less available deposit or smaller equity in their home, to move forward with their investment strategy.

Because the sales tax is only paid on the land value with the purchase of a House & Land package, this may also help an investor with less available deposit or smaller equity in their home, to move forward with their investment strategy.

3. DIFFERENCES in what YOU ARE ALLOWED TO DO

When you buy a unit you will typically need to conform to the already agreed rules by which that group of units is governed, comply with the governing bodies requirements, potentially attend or vote on group matters and apply for permission for certain aspects of what you want to do with your unit.

When you buy a house, you typically can do with that house and its land whatever you decide to reasonably do. There may be streetscape guidelines, which does help because it makes sure your neighbours don’t do anything weird that may not be great for your view.

4. DIFFERENCES IN YOUR LEGAL RESPONSIBILITIES

With both their will be:

  • rates to pay;
  • services to sign up for (noting that if there is ever an issue with service provision that requires costs to be incurred, then;
    • with a house you are only responsible for your own service provision matters,
    • BUT with units you may need to share the costs of issues someone else in the complex has with their provision of services and the ramifications may be broader (more expensive).
  • Legal requirements to comply with, which in the case of a unit will include the responsibilities you have under the overall strata structure.