Investment Property Frequently Asked Questions: Today you’ll explore what are the biggest problems in your investment property strategy? Investment property question…do you make time to do research?
How to generate cash flow? There are plenty of property investment strategies, right? What’s frustrating is not knowing which one actually increases your cash flow fast.
You probably already know not all investment property is created equal, right? So if you’re thinking you hate those unexpected surprises, it’s critical to know exactly what investment property fits your situation and property strategy.
What investment property are you looking for? Are you thinking of investing in rental property? Like all home buyers and property investors in Australia, you already have converns about the impact of failures on your property investments and would love to avoid those problems, right?
Property Investments Now fills in gaps and makes your experience more profitable and fulfilling taking full advantage of low home prices with low interest rates making this combination powerful.
Why invest in property?
Investment property via bricks and mortar has always been a favourite among Australian investors. More than ten percent of households own property investments, which is a far higher rate of ownership than US, Canada or United Kingdom.
Long-term returns of residential property versus other investments based on Gross (before tax) return over 20 years to 31 December 2006:
- Residential property 11.7%
- Australian shares 11.1%
- Listed Australian property 13.2%
- Fixed interest 10.0%
- Cash 6.8%
Source: ASX/Russell Long term investing Report Highlights April 2007
There are several key factors make property a sound long-term investment:
- Strong demand
- Ongoing rental income
- Long-term capital growth
- Tax-friendly returns
- Portfolio diversification
It’s worth taking a closer at each of these factors separately and in more detail:
Strong demand, here’s a fact. Australia’s population is growing every year. In 2005/2006, around
180,000 new migrants settled in Australia – that’s 72% more than in 1996/1997
All these people need somewhere to live, right? Historically around one-in-three Australian
households rent their home providing strong demand for rental properties.
Robust population growth is also adding to the prosperity of our economy and business sector. This in turn is adding to demand for commercial property.
Scarcity, despite a burgeoning population, our rate of new home construction is declining with industry research pointing to a shortfall of around 20,000 new homes annually. Significant shortfalls also exist in many areas of the commercial market.
Strong demand coupled with tight supply is pushing rents upwards, and it can also be a significant diver for long-term capital growth. For investors it means a better return on your investment.
How to buy investment property?
Properties are advertised for sale across a variety of mediums from advertisements in local newspapers through to online agents’ listings. Properties are generally purchased in one of two ways through private treaty or auction.
Private treaty involves negotiations between a buyer and vendor, often organised via an estate agent, with a final sale price eventually being agreed on. At this point you will usually be asked to hand over a cheque for 10% of the purchase price.
Buying at auction is different as the level of action tends to be fast and furious with bidding often over in just a few minutes. For investors it is wise to approach an auction with care. It can be easy to get caught up in a bidding war and pay more than you intended.
Remember, when you buy at auction the sale is final once the hammer falls. There is no cooling off period – something you may be entitled to with a private treaty sale.
Are positive cash flow properties hard to find?
This is probably one of the biggest misconceptions in the market place and one which costs many potential investors big money in lost opportunities. No need to fall into this trap!
Positive cash flow properties are not hard to find if you know where to look and how to find them. However, most people give up after a few phone calls and when they can’t immediately find a property that meets the formula.
It will set you apart from the crowd and may be worth hundreds of thousands of dollars to you if you make a mental shift to understand how and where to find positive cash flow property.
The first thing to understand is you need to know how to recognise an opportunity when you see one because some of the biggest opportunities in life are not going to come chasing after you.
You need to go looking for them and know what they look like when you find them. The key to finding positive cash flow properties is research and understanding growth area. If you need a detailed explained, click here to find out about complimentary property investor education.
I’ve been told positive cash flow properties don’t get capital growth?
This is probably the second biggest misconception many property investors buy into and it simply isn’t true. Positive gearing is known as leverage gearing which is a measure of debt against equity (ownership) you have in a property.
There are basically two ways to make money in property. One is through capital gains and one is via rental returns.
Some capital gains by property investors have been substantial and for this reason alone, its created a false impression capital growth is the only major criteria for buying and holding property.
You can get capital gains by property investing, but it’s a safer strategy to focus on positive cash flow rental returns because cash flow from your properties provides a greater degree of certainty and security than a speculative opportunity of capital gain.
For long periods of time real estate can be idol and all of a sudden may increase dramatically and before you know it, the value of your properties seems to skyrocket as buyers scramble to buy up everything they can get their hands on.
Rents on the other hand, tend to be far more stable and predictable. During property booms, rents will have trouble keeping up with the escalation in property values, however tend to climb steadily in small increments as the rental demand continues.
One of the biggest lies perpetrated by property marketeers is positively geared properties do not enjoy capital growth. This simply isn’t true!
Often there may be a timing difference between when inner city properties enjoy massive growth and when this filters out to the outer areas.
So next time someone tells you that positive cash flow properties do not enjoy the type of capital growth that negative geared real estate does, recognise it as a lie and ignore what you’re told as you know investing in high growth areas rapidly increases your equity.
Are there horror stories of tenants destroying rental properties?
Yes, horror stories do exist, the key to stress free property management is using a simple and reliable system for structuring the process of good tenant selection, property management and property insurance.
If you or your property manager check out your tenants past history, make sure to check up on their references and actually call to interview them, so you’ll usually sort them out fairly quickly.
Key to success in this area is to carry out regular property inspections as often as permitted by law or have you manager report to you in depth.
Bottom line, if your tenants do not look after your property properly, do not pay the rent on time or cause lots of complaints, it’s time to be firm and move them on.
Just to make sure you’ve taken every other precaution, you need to insure the property and recognise if steps in the process go wrong, you can always fall back on your insurance.
Is it better to buy new properties because older properties require more maintenance?
When you buy a new property you would certainly expect to have fewer maintenance issues than with an older property and where issues arise, it is likely that they will be covered by the builder’s warranty for a number of years. You also have far greater deprecation aspects.
Why buy cash flow positive properties if you miss out on all the tax deductions?
Depending on age of the property, your depreciation deductions will be lower when you buy an older property. Nevertheless if you obtain a quantity survey for your property, you may be surprised at how much depreciation can still be claimed.
The benefits of depreciation means there are many other tax deductions available to you as a property investor, irrespective of whether you bought new properties or older ones. You need to discuss these possibilities with your tax adviser.
It is a good idea to ask yourself whether what you’re being told is sales talk or whether it is fact.
You also want to think about whether what you’re being told is coming from a professional that really knows what they’re talking about or whether what they are saying is just their opinion.
Remember this golden rule, listening to opinions is a waste of time and talk is cheap…
The idea of managing tenants and rental properties is terrifying, is there an easier way of dealing with this problem?
Absolutely! Find yourself a good property manager, tell them what you expect of them and keep a close eye on what they do. Be willing to change your property manager if they do not perform to your expectations.
What if interest rates go up?
Although this is a very real fear, the Reserve Bank and individual lenders decide interest rates movements, so you have no control over it. What you can control is your own situation, so if rising interest rates are of concern make sure to develop cash buffers to deal with unexpected expenses.
You could opt for a fixed rate mortgage. remember you can also increase your rent in line with the market, so while interest rates may go up, your rental income may increase as well.
Should I buy properties in my own name or use an entity?
It depends on how many properties you want to own and your particular family and tax structure with individual circumstances. You need to speak with a property tax specialist to structure your portfolio, minimise tax and pass on your wealth to your loved ones as effectively as possible.
Can I buy real estate in my self-managed super fund?
Yes! Firstly, speak with a property tax specialist to structure your portfolio, minimise tax and pass on your wealth to your loved ones as effectively as possible.
What is a self-managed super fund?
A small or do it yourself superannuation fund is an individual, family or small business based fund of one to four members. The DIY fund is a separate legal entity.
This is what makes a DIY fund different to holding a member account within larger superannuation master trust or retail superannuation product.
Because of their small size, and the closeness of the relationship between the fund members and the fund trustees, the fund members have a far greater say in how the funds operate.
DIY funds form the fastest growing segment of the Australian superannuation industry. Australian Prudential Regulation Authority Statistics of January 2003 show 246,000 small funds with a total of 430,000 member accounts holding total assets of $99 billion.
On average self-managed super funds have 1.75 members, with a member account average balance of $230,000. (Source: The Association of Superannuation Funds of Australia Limited).
Does GST apply to all types of property investments?
When you buy, sell or build a new home, various taxes and charges apply. This may include Goods and Services Tax (GST). Introduced on 1 July 2000, GST is a 10 per cent tax on the supply of goods and services. It applies to some financial services and some types of property purchases.
GST is not charged on:
- Purchase of an existing home
- Residential rent
- Home loan fees and application fees
- Sale of a house by a private owner.
GST is charged on:
- Purchase of a new home
- Purchase of land from a registered builder
- Home renovations and repairs
- Services associated with purchasing a home *inspections, conveyancing and solicitors.
What about land tax?
Land tax is a state tax which varies from state to state. Some states have an exemption threshold which applies before land tax is levied.
Thresholds may be different depending upon whether you buy the properties in your own name or in an entity.
Larger portfolios will generally attract land tax and it is your responsibility to find out if you are liable for land tax. Consult with your property investments accountant for specific advice regarding your particular circumstances.
Is the real estate game over? Maybe you’re thinking its too late? Can you still make money investing in property today?
Four steps need to happen in order for you to worry about the future of your real estate investments:
- People become addicted to sleeping without a roof over their heads
- Young families stop making love and babies
- New way to manufacture vast quantities of cheap, vacant land near major cities
- World’s demand for Australia’s commodities and resources comes to a standstill…
Seriously, imagine when people won’t be buying and selling real estate. Imagine a time when people won’t want to be financially independent. That’s why we’re confident about real estate…
As long as people need food and shelter, roofs over their head and families grow with kids, real estate is a sure winner…
What’s the difference between positive gearing and negative gearing?
Positive gearing or positive cash flow means after all expenses of owning and managing your rental property have been met, you have a cash surplus from your properties before any tax refunds are taken into consideration.
At worst, you’re at a break-even situation because Land tax is an expense, only certain investors with larger property holdings incur, you don’t allow for Land tax in positive cash flow calculations.
Most people are into negative gearing so as their property portfolio grows, many negatively geared investors eventually reach a point where they can no longer get finance to buy another property.
Now, each property they buy, they need to put in more of their own cash or income. Negative gearing is where the investor needs to contribute money out of their regular income to support their investments.
Since they need to meet living and lifestyle expenses out of regular income, there is clearly a limit to how many properties the negatively geared investor can purchase before the banks say stop!
The only way an investor can keep buying more properties is to gets a substantial pay rise or if the rental income from their existing properties increases dramatically.
Even though properties may be appreciating, the negatively geared property portfolio still requires ongoing external cash resources to pay the bills and more particularly, to service borrowings.
We’ve heard more than one negatively geared property is better way to invest?
Have you invested in property so you could eventually leave your job but now find the more properties you own, the more you need your job to keep paying for the investment properties?
There’s a lot more attention and focus on positive cash flow property investing, these days some negative gearing advocates have re-invented themselves as positive gearing gurus and marketers.
The debate about positive cash flow property is whether you can achieve a positive cash flow from the loss making negative properties through tax refunds arising from the depreciation allowance?
For example: If your loan interest rate is 6.5%, how could your property possibly be achieving positive cash flow when you still have to meet the cost of council rates, water rates, property management fees, insurance, repairs and possibly body corporate fees?
If you allow for tax refunds on your cash outgoings and non-cash items such as depreciation and do the calculations using individual tax rate of 48.5%, which may or may not apply to you?
If you want to pay the least amount of tax, your tax refund is at a lower rate, which means you’re loosing cash. That’s money coming out of your pocket and we call this negative gearing.
The depreciation allowances which are used in negative gearing calculations, actually decrease over time as furniture and fittings are often fully depreciated between three and five years.
If you rely on these items for cash flow, you may find yourself dipping into your pocket once these depreciation allowances run out unless your rental return increases sufficiently to cover shortfall.
It ‘s your choice what type of properties you invest in. It is also your choice whether you invest or not. You choose whether you want to lose money by using negative gearing or whether you want to invest to make money.
How do I get money to start investing?
If you own your own home or any other piece of real estate, you may have equity in this property to use in buying one or more investment properties. If you don’t own any real estate and have a well paying job, you may be able to start on your investment portfolio straight away.
It depends on how much you have in savings or what type of loan you can get and type of property you want to invest in. These days there is a large variety of loan products available including low-doc and no-doc loans, which can help a variety of investors.
You can find joint venture partners to work with you and invest in property for mutual benefits.
Is it always a good time to buy property?
It depends on the overall market trend, current interest rates and particular property you’re looking at because there are good times to buy property and there are even better times. Buy during times as sellers are more negotiable.
This is because demand is low and property prices are stable or falling and it takes a long time to sell a property.
If the market is hot, your chances of negotiating a good deal are lower than when vendor is struggling to sell the property, particularly if seller is under financial pressure.
Good deals can still be found in a strong trending market, although they can be harder to find and are more easily recognised by savvy investors doing their research, due diligence and know where they are most likely to find it.
It makes sense do your research and invest when the numbers stack up in your favour. If the property market is hot in your particular area it may make sense to check out other markets.
Do property prices ever fall?
Property is no different to other markets. Prices go up and down with supply and demand and the need of particular vendors to sell quickly.
The good news is property is not as volatile as some other markets and even though values may pull back a little for a while they often tend to stabilise rather quickly.
Another important fact to be aware of with the types of properties you look at for positive cash flow should be in regions with massive government spending and intrinsic value through mining, infrastructure, industry and development.
This is the biggest sector of the market. This is the sector that experiences the smallest impact in an economic downturn. It’s the top end of the market which gets hit first because tenants scale back their accommodation expenses in a financial squeeze and look for something cheaper.
That means demand for average properties actually increases. These properties are predictable performers, you can own more properties for same investment than at the top end of the market.
For example: Buy three properties for $100,000 rather than one for $300,000 because with three properties the risks are split three ways. If one of the tenants moves out, you still have another two to pay the mortgage. If tenant in $300,000 property moves out, your cash flow stops.
What are the advantages to using a company like Property Investments Now instead of doing it on my own?
Our free property investment advice is provided to source property market past history and future growth information from reputable independent research companies to locate the right property investment.
Is property investment was for high-income earners or the wealthy?
Statistically in Australia, over 70% of property investors are on incomes between $35,000 and $40,000 per annum. Over 90% of all millionaires become so through investment in real estate.
What if I have no deposit for an investment property?
Cash is not really necessary if you have equity in your own home. You can use assets to securely borrow the full amount plus all the additional costs. Finance your investment property utilising an investment property loan which is affordable with manageable repayments.
What happens investment-wise with residential real estate?
Its is the compounding effect of property value increases which is so powerful because as each year passes growth occurs on top of growth…for example:
If property is valued at $100,000 and next year it increases in value to $110,000, if the year after it increases at 10% again the value is $121,000, that’s $110,000 plus 10% or $11,000. This is the exponential growth accelerating at a faster rate as each year passes.
Property wealth creation is a step-by-step and progressive with prudent property investment all you need is the right information, time and eventually it all pays off in abundance.
What if interest rates rise?
Present rates are still falling and should continue to fall into next year. No one knows for sure at what point rates stop falling but your lending expert has a very good feel for movements of rates.
You could consult and discuss a loan strategy for the following reasons:
1. In current rate your lending expert would advise against a fixed rate property loan as it is more likely rates go down than up, so being trapped at a high fixed rate is not where you want to be.
Your expert would recommend a variable rate loan to take advantage of future drop in rates.
2. The reverse is true when rates are going up. Invariably at the top of rate cycles is the best time to buy well priced properties.
3. At the time of your property purchase an investment analysis should be done to show what tax benefits flow from your investment. One benefit relates to interest that you pay on your loan.
You may claim the interest back at the highest rate of tax that you pay the ATO either as a PAYG earner or self employed person. You may in fact claim this and other tax benefits through your regular pay cycle or in a lump sum at the end of the financial year.
If you’re using a variable rate loan and rates go up you pay more interest, however you can claim more back through tax benefits. Remember investment property is a long term investment and interest rates rise and fall over the life of the investment property.
Is the golden rule of borrowing money to borrow for appreciating assets?
Borrowing to buy investment property, not for consumables that depreciate in value is the right way not borrowing money to buy depreciating items like cars etc, which can become worthless.
Using debt for appreciating assets such as property, is the most important tool to building wealth.
Why hasn’t my accountant told me everything about investing in property?
When you go to the service station for petrol, does the mechanic come running out to suggest your brakes need checking or that it’s time for a tune up? Its true we expect too much of accountants.
They should be able to answer all of your questions competently, but don’t expect them to be creative in guiding your wealth creation. Accountants are usually good in their area of expertise.
They expertly complete the tax forms for you after you have provided them with all the figures and are usually not specialists in property investment and should not be relied on as such. However, there are some accountants specialising in property, and even have rental property of their own.
I don’t need advice because I already have an accountant and financial planner?
That is great. We do not try and replace them. You will find that your accountant is an historian he will work with what has happened whereas your Financial Planner works with you in relation to your shares. We deal specifically in property…
What is a buyers advocate?
A buyers advocate is a qualified real estate professional who assists the vendor in choosing the right agency and the best sales person to sell the property. The advocate stands between the vendor and the agent chosen.
What is real estate advocacy?
Independent real estate advice, help and professional representation for buyers or sellers to make the process of sale or purchase easier for you maximizing results.
Real estate advocacy remains totally independent of all real estate agencies by acting as representatives for buyers or sellers, protecting your interests.
The scope of real estate advocacy work goes beyond accountants, solicitors, surveyors and other professionals involved in property transactions and can make huge savings for buyers with a more desirable and profitable outcome for sellers.
Why work with exclusive buyers agent?
When you work with an exclusive buyers agent, you’re working with a professional focusing on your best interests to helping you to locate a pre selected list of houses based on your individual needs and budget.
Recommend estate agencies for you to approach when looking for a house by providing independent appraisal and recommendation on initial offer you should make, then negotiating final offer to purchase the property
Feel free to ask any answers you have about property investments, positive cash flow property and positive property investments, please click here for help…
Want ready to go and done-for-you?
Property Investments Now do all the work for you because we empower you with confidence to invest in your better lifestyle and reach your ultimate financial freedom.
Yes! We’re very selective in choosing the right investment property and area for you depending on your circumstances. You need to invest in areas where jobs and population are increasing.
There must be a low vacancy rate, rents of properties must follow a guideline based on supply and demand matched to affordablity because its easier to rent out and get cash flow positive.
The area should benefit from a large percentage of owner occupiers rather than renters. By purchasing a new home on average size block of land in growing areas usually in new estates you achieve high land content, higher rental yield and maximum depreciation benefits.
This all adds up to having a manageable investment that will have good long term growth, less maintenance and will always be more affordable to hold.
Most real estate agents sell properties they happen to have for sale in their district. As a result the investor receives a very high negative cash flow on the property by having a low rental yield and/or little depreciation benefits on a second hand property.
Property research in growth areas with emphasis on:
- Area profile
- Population forecast
- Interstate and international migration
- Government spending on infrastructure
- Local council and state government strategy
- Local economy and employment
- Housing supply and demand
- Recent sales
- Rental demand and returns
- Professional research data through Residex, ABS, RPData, and various local government Reports
- Relationship with some of Australia’s largest builders and developers
- Full turnkey investor inclusions on all properties (landscaping, blinds, appliances etc)
- Source and oversee construction of new house and land packages
- Supervise property management
- Prepare landlord insurance
- Provide depreciation schedule
- Manage all communications between you and our alliance professionals
Property Investments Now helps home buyers and property investors:
- Education on how to invest in property
- Determine if you are in a position to start investing
- Prepare a strategy to determine how many properties you might require in retirement
- Negotiate with agents/builders
- Oversee the rental property management
- Prepare a pre-approved loan from finance of your choice
- Source investments that suits your specific needs
Why not allow Property Investments Now to help grow your property investments portfolio?
Is your personal, family and work time being consumed by research, financing, sourcing, building and property management issues? Want to lower risks and get greater return on investments with more time for yourself and family to invest in your better lifestyle…
Investment Property Frequently Asked Questions