Planning your Future

Most people make investments with a view to strengthening their financial future. It’s important to know why you’re investing in property and what your goal is.

Things to consider— why are you investing?

When thinking about purchasing an investment property, consider some of the following:
  • What might the return on your investment be?
  • What are the costs of buying and selling?
  • What costs are associated with borrowing the money?
  • What is the rental potential or future capital gain potential of the property?

Making your decision

When considering making a significant investment, you need to consider the pros and cons before making your decision.

Pros to property investment

  • Safe investment:
    Historically, property holds value very well and demand is continually increasing.
  • Rental income:
    Property in desirable areas can generate excellent rental income.
  • Capital growth:
    There is a good chance your property’s value will increase over time.
  • Minimize risk:
    Your property can be insured against most risks, e.g. from fire/damage from a tenant who breaks the lease or damages the property.
  • Anyone can invest in property:
    You don’t have to know a lot about property investment compared to stocks, art, or starting a business.
  • You’re in control:
    You make all the decisions. And you have control over the returns you get. You can even improve the value of your investment by renovating.
  • Tax benefits:
    If you’re using a loan to buy an investment property, there may be multiple tax benefits available.

Cons, or things to be aware of

  • Rent-free periods:
    There may be times when you can’t find a tenant and the property will remain vacant.
    This means you’ll need to plan for the costs yourself over that time.
  • Liquidity:
    It’s sometimes difficult to sell property quickly, as opposed to other investment types such as shares.
  • Tenants:
    Tenants can sometimes damage the house or its contents, refuse to pay, or even refuse to leave. These types of disputes can be stressful.
  • Ongoing costs:
    These include fitting out, maintaining and repairing the property, building and landlord insurance, land tax, as well as water and council rates.

Property investment strategies

When borrowing for an investment property, it’s important to consider your budget and cashflow, including some margin for any unexpected expenses or interest rate rises. Once you’ve covered all the bases, it’s relatively straightforward. Your property’s value should gradually increase and generate equity in the coming years.

Using equity to buy your investment property

Equity is the difference between what you owe on a property and its market value if you were to sell it.

For example: if your home is worth $400,000 on the market, but you only owe $150,000, then you have equity of $250,000.

This means that you potentially have access to $250,000 in equity if you refinance your loan. Utilizing the equity in your home as a deposit is a great way of securing finance for an investment property.

Buying an investment property through a superannuation fund

Did you know you can now use your self-managed superannuation fund (SMSF) to buy an investment property? This is another investment option and we can refer you to an accountant to find out:
What you can and cannot do with your SMSF

  • The benefits of using a SMSF to buy a property
  • The challenges and pitfalls of taking on such an investment
  • Using the correct trust structures
  • Tax strategies and deductions.
Buy, renovate and sell (also known as “flipping”)

Purchasing a run-down property and then flipping it by renovating it and selling it on is a strategy some investors use to build equity and make profit quickly. However, to make a profit, you need to consider factors such as agent fees, stamp duty and home value price trends. With this strategy, you will have to considerably increase the value of the property to make a profit as you will be required to pay tax on any capital gain.

Choosing the right loan

The right loan and loan structure will mean your money works better for you. But with a huge variety of investment property loans available with different rates and features, deciding which type of loan is right for you can be overwhelming.

The good news is that we can help you understand your options and assist you during the decision-making process. We are investment finance experts and we do all the legwork for you. We can access a wide variety of investment loan products, from a range of leading lenders.

Basic home loan

This is an excellent option if you’re looking for a simple loan with a low variable interest rate, and low fees. Basic home loans have fewer features and can be less flexible than other loans. However, they do offer opportunities to save money. They are a good option for first home buyers and those with straightforward borrowing requirements

Standard variable loan

Standard variable rate loans have more features than a basic home loan, including the benefit of an offset account and/or redraw facilities. Money held in your offset account will ‘offset’ the balance in your mortgage account, effectively reducing your interest payments. Lenders will charge an annual fee for this type of loan.

Redraw facilities allow you to make extra repayments on your home loan and redraw them later if needed. It’s also an effective way to save money on home loan interest

Fixed rate home loan

Fixed rate home loans allow you to lock into an interest rate for a period, which can be anywhere from one to seven years. This means you can enjoy the certainty of knowing exactly what your monthly repayment will be. After the fixed term, these home loans usually revert to the standard variable rate. With this type of loan there is not always a redraw facility or the opportunity to make extra repayments during the fixed rate period.

Split home loan

A split loan offers you the option of having part of your loan fixed and part variable. This gives you the benefits of both loans in a single home loan. Contact us for more information about this type of loan and how you could use it to your advantage.

Interest only loan

An interest only loan allows you to miniseries mortgage repayments and outgoing costs in the short term. They require you to pay just the interest on the loan—which is usually tax deductible. An interest-only loan could be a good idea if you are investing on a tight budget and require the rental income from the property to cover all your costs. It may be possible to organize an interest only period for a set term, then allow the loan to revert to a variable rate principal and interest loan after it ends. We can help you decide if this type of loan suits your circumstances.

What is negative gearing and how does it work?

As a property investor, you’ve probably heard the terms ‘positive’ and ‘negative’ gearing bandied around quite a bit. But how do these strategies work, and how could they impact your investment profits?

There are three types of gearing strategies
  1. Positive gearing is when your rental return from tenants is higher than your interest repayments and outgoings. This is considered a positive cash-flow strategy.
  2. Negative gearing is when your rental return is less than your interest repayments and other outgoings. This is considered a tax-minimization strategy – as any losses are usually tax deductible.
  3. Neutral gearing is when you earn the same amount from your investment property as you pay in interest and other outgoings.
Why negative gearing is the most popular strategy

The main benefit of negative gearing is that any losses you make on your investment property may be used as a tax offset against other income earned. This means that you end up reducing your taxable income and therefore your tax payable. We can help to structure your loan and secure your investment property funds, but for tax advice around gearing your property, speak to your accountant. If you don’t have one, we can refer you to some highly reputable and trusted leading tax professionals.

Things to consider when gearing

Some taxpayers choose negative gearing to maximize their tax returns and benefit from long-term capital growth potential. On the other hand, people close to retirement age, or those on lower incomes, often choose positively geared investments to maximize their income potential.