Olivia Maragna - CEO Magazine - Is investment property right for me?
Investing in property has been a popular way for Australians to build long-term wealth but like everything there is a time for growth, usually followed by a period of slowing down. So whilst it’s unlikely in the short term to see a repeat of the property boom we have experienced in the 2000’s, the question is now waged – is an investment property right for me?
The fact that every property is different and its value depends on its location, individual characteristics and local demand doesn’t assist in an easy answer.
For instance, in the quarter to March 2013, house prices rose in Perth (+1.2%), Melbourne (+0.2%), Darwin (+1.9%) and Canberra (+0.2%) and fell in Brisbane (-0.3%), Adelaide (-0.1%) and Hobart (-0.3%). Sydney showed no movement for the quarter. Nationally, over the course of the year to March 2013, house prices increase on average by only 2.6% across the nation, yet house prices in Darwin rose by 8.0% during the same period.
So whilst the share market over the same period has returned nearly 13%, it’s important that you understand why you are investing in property and to ensure you are getting the most from it.
The demand and affordability?
The trend of improving housing affordability has continued into 2013 with affordability rising by 1.2 per cent in the first three months of the year. Falling interest rates and subdued house prices were the main reasons for the improvement with the index now 12.8% higher than twelve months ago.
However this improvement to affordability wasn’t consistent across the country with the cities of Perth, Adelaide and Hobart seeing a decline in affordability.
Compared to average wages, the average cost of house prices was 4.5 times average income in 1986 but is now over 9 times of recent. All other capital cities have experienced a similar sharp rise in this multiple particularly since 2001. With lower interest rates and some slight easing in housing prices, affordability has improved slightly.
What about investing?
Average rental yields for 2012 were around 4.1% for three-bedroom houses and around 4.8% for units, however, this level of return is not attractive unless capital gains are more probable. On top of this, the income you receive is not tax advantaged income like share dividends where up to 30% of the tax on the income is already paid. However property allows you to leverage or borrow to a much larger extent which can provide tax advantages. So whilst there are some obviously comparisons, ensuring you maximise your property investment is essential.
Look out for these Tips and Traps
1. Long term loan structure
There is a wide range of borrowing facilities available in the market. Home equity loans are popular because they can provide an interest-only loan. Choosing between an interest-only loan and a principal and interest loan is a key question for you as an investor. An interest-only loan means you minimise your costs and maximise the interest expense for tax deduction purposes. The return on your investment will come from the potential capital gain. Consider an offset account and concentrate on putting any extra repayments in there as opposed to the loan itself. This means that in the long term, you can take those funds out of your offset account and continue to reap the benefit of claiming the interest on the loan.
2. Hold a buffer
Establish a bank account specifically for the investment property and work out what surplus income you will need to support the loan plus meet the expenses of holding the property (like rates, body corporate fees, insurance and maintenance) and keep this in the account as a buffer. You don’t want to be in position where you are forced to sell an investment at a potentially bad time, so keep a nice buffer for the unexpected like a period of vacancy.
Have all income and expenses of the property coming in and out of this bank account so you can keep the investment accountable. It will also be handy at tax time to help ensure you claim all your expenses. There will be a tax break if you negatively gear but it is wise to ignore that and focus on the quality of the investment initially.
3. Think about ownership
Setting up your property the correct way from the beginning can mean bigger and longer tax benefits in the long run but also help with any risk issues from employment. Don’t be tempted to just buy a property in one or both names as this can have a long term effect on the longevity of tax benefits of the investment. There are pros and cons on how you hold your investment so ensure you run trough all possibilities with your financial adviser to maximise your return. Consider a family trust but be aware of losses as these are trapped in the trust and can’t be used to offset employment income.
4. Beware of Risk
If you are in a role where you are likely to sued, consider if you want to risk your investments. Consider options to protect your assets particularly as you start to pay down the loans. Using a professional property manager to look after your investment property is wise and can help put the compliance risk on them.
5. Always seek independent advice
Many organisations selling investment property will offer to make the process simple by bundling all the services you need together. Don’t be tempted – use your own valuer, solicitor and building inspector for structural and pest checks. Evaluate the local market yourself. Do your own “due diligence” by asking other real estate agents or research on the internet in the area about the rental market, property sales and likely capital appreciation. There are lots of websites that provide these records for free.
Property is a long-term investment. Just as gamblers talk about their latest win, you will hear people talk of the short-term killing they have made on property. You may be one of the lucky ones, but most people hold a property for five to ten years to realise any significant value.
Whilst tenant income and price movement are important, more significantly think about your ownership and loan structure as just these two issues themselves have the ability to assist you with many tax benefits for many years to come.
Whilst there may be some property opportunities available, many economists still say that housing in Australia is over-valued and there may be better opportunities in other asset classes. Like any investment market, this doesn’t mean that there aren’t bargains to be had, but more importantly the homework needs to be more thorough and astute.
Olivia Maragna is the co-founder of Aspire Retire Financial Services and has been named the Australian Adviser of the Year. Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.
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