Thinking of investing in property? Here’s what you should know
If you’re thinking about buying an investment property in 2018 but you could benefit from some guidance, you’ve come to the right place. We understand that dipping your toes into the world of property investing can appear daunting, that’s why we’re here to bring confidence to your decisions.
Let’s start by looking at the main three benefits of property investment:
- Capital growth
Capital growth is the continued growth in the value of your property over time. This strategy generally requires you to hold onto the asset over a longer period of time.
As an example, if you purchased a property in 2013 for $300,000 and it grew in value by 5% each year it would be worth $383,000 in 2018 and you would have made an $83,000 capital gain, minus any expenses and taxes.
If you are looking at re-selling the property rather quickly, one thing to be mindful of is the Bright Line Test which has been in for the last few years and helps determine how much capital gains tax (which is simply payable tax on your property’s profit) home buyers and sellers have to pay, should their sale be within two years of the purchase.
- Rental and investment yield
Rental yield is the money you earn from rental income minus the expenses you incur owning the property. With the right structure, a property investment can generate a monthly income stream and high investment yield. Investment yield is the yearly amount of rental income you earn divided by the total loan deposit you made.
As an example, if you earned $10,000 in rental income after your expenses and deposited $100,000 on your loan your investment yield would be 10%.
- Tax benefits
There are tax advantages for all types of property investors; you can claim expenses you incur owning the property and if your rental income is less than your mortgage payment, you can offset losses incurred in the property investment against your taxable income.
Why existing home owners might choose to buy an investment property
If you’re an existing property owner who has been paying off a mortgage, you may have equity in your property which could allow you to make another purchase without having to put down a deposit or make a large upfront financial commitment. The more equity you have the better, as the lender will likely be more willing to approve a higher loan amount. It’s important to note however, that there are lending restrictions with banks depending on your deposit size, whether it be equity or cash. That’s why it’s as good a time as any to speak to a mortgage advisor as banks are capped at lending up to 65% on an investment property, while borrowing from a non- bank lender often isn’t as tough, commonly lending at 80% for investments.
But what if you’re a first home buyer? Can you still purchase an investment properly? The answer is yes. It’s not uncommon for property investors to purchase an investment property the first time that they buy a property. This is partly because banks may increase the borrowing capacity for if you apply for an investment property, as the bank will factor in the rent that you’ll earn from the property, as well as your income. Purchasing an investment as your first property can be a great way to build a solid financial foundation for the future. You’ll get all the benefits of owning a home, such as building equity in a large asset, whilst still enjoying the flexibility of renting.
If you’d like to see how much equity you have and are thinking about investing in property, get in touch so we can talk about your options.