PROPERTY INVESTMENT LOANS
Congratulations on finally taking this step! Building wealth on brick and mortar is what every man hopes to do one day. Be it investing in residential or commercial property, a wise and patient decision can help you generate consistent, tax-friendly rent returns with long term growth in value.
If this is your first property investment, you must know that the process is going to be a little different than getting a home loan in which you plan on living. Fear not! We have helped hundreds like you get their investment loan easily.
Our mortgage brokers compare hundreds of loans from a wide variety of lenders and work with you to find the right loan that suits your individual needs.
What pulls people towards investing in a property are the benefits of doing so – regular rental income, tax benefits and ever increasing value in the long term. However, it must not be ignored that getting a loan for an investment property is considered riskier by the lenders (or banks). The sources of this increased risk go from defaulting as a landlord, tenants destroying your property, not having tenants at all to over extending yourself. Hence, convincing the lenders becomes harder.
Also, an increased risk means a higher interest rate on the loan, a higher down payment, and going through stricter loan issuing standards.
Therefore, to reap the desired rewards from your investment, dedicate substantial time towards landing the right home loan.
Questions to ask before you begin
|Commercial Property||Residential Property|
|What is it?||Covers a wide range of options from office, retail spaces, car parks, to industrial properties like warehouses and factories.||Covers apartments, standalone houses, bungalows and duplexes.|
|Affordability||More affordable and sometimes even cost less than residential property
|Require more maintenance and cost higher than commercial properties |
|Long term leases||These usually run for longer periods (several years).||These usually run for shorter periods (6 to 12 months).|
|Vacancy period||Can be long||Tend to be shorter.|
|Impact of Goods and Services Tax (GST)||Applicable; but you can claim it back as an investor.||Not applicable.|
|Maintenance costs||Paid by the lessee||Paid by the landlord|
|Risk and rental returns||Higher risk and higher rental return||Lesser risk and lesser rental return|
|Deposit required||Larger deposit required, >30% of the purchase price||Lower deposit required, nearly 20% of the purchase price|
Apartment vs. House
|More affordable, provide higher returns||Land component of the property increases the potential for capital growth|
|Easier to maintain||Comparatively difficult to maintain, but have greater scope of adding value through renovation|
|Strata fee required for maintenance||No strata fee required for maintenance|
|Depreciation deductions are greater as depreciation on commonly owned facilities can also be claimed.||They offer scarcity factor which means fewer periods of vacancy.|
New vs. Existing property
|New Property||Existing Property|
|Artist’s impression can paint an overly flattering picture leaving you disappointed.||You know exactly what you are buying (outlook, size, finish, neighbourhood).|
|It is likely to be fresh, clean, modern and defect-free.||They might have signs of wear and tear and possible defects and pest infestation.|
|Offers greater depreciation benefits and requires less maintenance over time.||Offers lesser depreciation benefits and requires more maintenance over time.|
|You might over or underestimate the rent amount which you can command.||They have a known rental history, a value you know you can demand.|
|You can also charge a premium rent for providing a new property.d.||Provide better opportunities of adding value through renovation, subdivision, etc.|
|Appliances would be covered by warranties and insurance||Appliances may be out of warranty period and may require repairs.|
Features to look for in a property
- quiet street and neighborhood
- good lighting on street
- home security system
- Off street or undercover parking
A pleasing outlook
- good transport links
- close to lifestyle and public amenities
- great look from the window
- amiable neighborhood
- must be an area of demand for rental
- robust local economy
Private treaty vs. Auction
|Seller and buyer enter into a private negotiation, generally supervised by a real estate agent.||Whoever bids highest, wins the property. It is better to appoint someone experienced to bid on your behalf.|
|Upon initial agreement, a deposit of about 10% of the agreed sale price is paid by the buyer.||If you win the bid, you have to submit the closing deposit then and there.
|As a buyer, you can call off the purchase anytime during the cooling off period.||There is no cooling off period and hence, you cannot back out of the purchase.|
|The whole purchasing process takes weeks to iron out negotiations.||Buying at auction is quick and sale can be closed within a few minutes.|
|You can apply for a loan later to finding a property.||You must have a pre-approved loan before bidding into the auction.|
Better suited Loan types
Fixed rate loans
- Since, the interest charged annually can be calculated upfront and pre-paid each year. This lends you the ability to claim this amount as a tax deduction.
- This can even out your tax bill for the past years where income from other sources was higher than normal.
Interest only loans
- Here, you will have to pay only the interest on the loan and no repayment of the principal.
- The principal will be paid at the time of selling the property./li>
- Additionally, all your repayments are tax deductible.
- For serial property investors, this is a very lucrative option. However, it must be kept in mind that most lenders offer this option only for a limited period (~5 years).
Line of credit
- This loan will allow you to withdraw cash from your loan up to a certain limit as and when you need.
- In line of credit loan, your loan balance gets reduced by the cash coming in and increased by cash going out.
- This loan is best suited for an experienced investor as there are no set repayments and a certain level of cash management discipline is required.
Associated costs and option of equity
- Establishment fees
- Solicitor fees
- Stamp duty
What is equity?
The difference between your current property’s market value and unpaid mortgage is called your equity. Owning a home for several years builds up reasonable equity in that home and can act as a valuable resource if you want to invest in a property.
However, accessing equity can only be done if you pay certain fee and costs, one of them being Lender’s Mortgage Insurance (LMI) if you want to access over 80% of your property’s value. Choosing another lender or loan type will have its own associated costs too.
How to access equity?
- Calculate the available equity – This can be estimated properly by a real estate agent or credit advisor by comparing the recent sales within your area and guessing your home’s estimated market value.
- Calculate the ‘accessible’ equity – Not all of your equity is accessible. Your servicing capability of repaying any additional payments play a crucial role here. An experienced mortgage broker will be better equipped to advise you on this matter and help you work through your finances.
Managing your property
A rental property needs regular maintenance unlike any other investments such as shares or a term deposit. Looking after the property yourself or appointing a professional property manager is solely your choice.
DIY vs. property manager
Involves hassles of legal obligations as a landlord
|Do it yourself||Property Manager|
|Saves money||You may have to pay a fee of about 7% of the rental income to the manager.|
|Property manager can advise you on how to handle your legal obligations|
|It might take time and money to handle tenants, property inspections and repairs.||Property manager can take care of all these things.
If you decide to sell
If you decide to sell your investment property then, you need to pay Capital Gains Tax (CGT), which is a tax paid on the difference between the selling and purchase price of the property, which can include:
- amount paid for the property
- legal fees
- stamp duty
- other upfront costs
- cost of renovations done by you.
The Tax Office calculates CGT from the date you entered the contract as the date of purchase, and not the settlement date. So, you must maintain a strict calendar about every detail. Also, properties purchased after October 1999 which have been owned for a period of 12 months, may stand eligible for a discount of up to 50% on CGT depending on the ownership structure of the property.
For such reasons, CGT calculations have a tendency to get complicated and thus, a credit advisor must be consulted to avert any undesirable situation.
Tax deductions you can claim
You can claim two types of depreciations – depreciation on fittings and fixtures and depreciation on the building itself. Buildings constructed between 1985 and 1987, depreciate by 4% annually, while those constructed after 1987 depreciate at 2.5% annually.
Depreciation is one area where it pays to get professional assistance. With a quantity surveyor you can be assured that the property will be properly inspected. He will also draft a complete depreciation schedule ensuring that nothing is missed out on depreciation deductions and nothing is overstated in your claim, which could cost you tax penalties.
When your property generates less rental income annually than your yearly mortgage repayment amount, it is called to be a negative gearing property. This is a taxable loss which means that you can get the negative amount deducted from your tax returns by showing a loss. This is called PAYG Withholding Variation. However, it must be done with caution, because a loss, though it may provide some short term benefit, is a loss in the long run.
Minimizing the risk of negative gearing:
- Choose a property that is in a good location with premiere amenities available closely. This will ensure that your property is never out of tenants.
- Manage your income well enough to pay off all the expenses of maintaining the investment property.
- Get your mortgage insured to protect yourself from any unforeseen circumstances.
When your property generates more rental income annually than your yearly mortgage repayment, it is called to be a positive gearing property. This is a taxable profit and you, as a landlord, need to set aside some amount to be paid as taxes of owning that property.