Thinking about buying an investment property? As a high income earner, your accountant has mentioned that it might be a good way to save some tax. So how do you go about getting the process underway? We have broken down the main steps to take when purchasing your first investment property:
1. Map out a plan with your mortgage broker
The best place to start is to speak with your broker and map out a plan. Work out how much you can borrow and how much it would actually cost you. By this I mean, how much is needed to be set aside each month from your surplus cash flow? Work through all the “hidden costs” like rates, insurance, body corporate fees and tenant insurance so that you are fully covered and planned for all costs. You should feel more comfortable about the process after doing this budgeting exercise.
2. Consult an accountant
It’s important to speak to your accountant to work out if there will be any tax implications, what depreciation is available and what state charges are applicable. By buying an investment property you may trigger things like capital gains tax, negative gearing and having to pay land tax.
3. Ensure you secure the right type of loan for your needs
You need a loan that is structured to suit your needs and the actual borrower is in line with your tax strategy. Sometimes it might be as simple as borrowing in your own individual name or it could be to set up a corporate structure that owns all your properties going forward. Serious property investors generally look at the latter option.
To understand the current lending environment, the corporate watchdogs are critical. Australian Securities Investment Commission (ASIC) and Australian Prudential Regulatory Authority (APRA) are now enforcing more rigid restrictions in the lending space with the aim to slow down the heated housing sector, especially in Melbourne and Sydney. This has caused the banks to change their lending strategies with investment loans. Currently, interest rates for investment loans are up to or more than 1% higher than regular home loans. Now more than ever, you need to be well informed as to the types of loans available, the best interest rates and whether the loan should be interest only or principle and interest. Fixing the loan is also factor to consider with some lenders being 0.5% cheaper than a variable loan.
4. Find the right property
The next step is the exciting one, finding the most suitable property. People look for yield (what the rent is vs the value of the property) or growth. In a perfect world, you get both! I personally favour growth for the pure reason of having a good lump sum to walk away when you sell. It’s a forced way of savings. Some investors do prefer a positive cash flow approach and focus on good yielding properties, they are generally found outside the major cities. It clearly depends on your personal circumstances, your risk profile and the surplus cash flow you have available.
Whichever way you proceed, the ONE thing I can 100% guarantee, if you don’t spend the time with your professional advisors, do your own research and write down your goals, you will never buy an investment property.