Tag Archives: buying an investment property in victoria

Buying an Investment Property?

Invest In a Unit or House?

 

Why are you exploring the possibilities of buying investment property? In Australia, the reality is the more you invest, the less tax you pay. Ultimately…the less tax you pay, it means you’ve got more money in your pocket to help drive your debt down.

Are you with me? Do you understand what is going on? 95% of what I am going to show you, you already know. The key distinctions about what makes buying investment properties is how you can put the property investments to work in your own life.

So if we apply this to your life, why would you limit yourself to one investment property? When you buy property/real estate today you are buying at a discount in relation to the future as this increase is called capital growth.

These are core structures for financing all of your property investments and wealth creation. In principle, it really doesn’t matter if you buy a house, renovated and sold it, if your investment money comes from business or wherever…

Buying investment property means you get your money working harder for you. The more you positively leverage you investments, the less tax you pay. Less tax…more you can drive your debt down, and more you can drive your debt down the more you can invest!

Why use equity to buy investment property? If you are already a home owner you may not need to provide a deposit to fund the purchase of an investment property because equity is the difference between value of your home vs how much you owe or borrowed from the bank against it

Want to understand what equity is and find out how to access equity in your own home and use it to purchase an investment property? Simpy push the play button and watch this video.

There are several ways to make the most of your existing equity buying an investment property without actually tapping into your savings. Unlocking the equity in your home can be an effective way to assist in purchasing a rental property to help build your wealth.

Buying an investment property…why invest in units is a common question asked by property investors regarding tax depreciation, so why does a unit get more depreciation deductions than a house?

buying an investment property
Are you watching others around you build their property portfolios and wondering how to buy your own investment property?

When investing in units you need to determine depreciation deductions available in a property, factors which affect
calculations include:

(a) Purchase price of the property
(b) Date which construction commenced
(c) Settlement date
(d) Land value
(e) Value of fittings and fixtures within property (where relevant)…

The overall cost to build residential units increases due to the amount of infrastructure involved in walls, services, etc by comparison to the less compact layout of a house or residential property which can make a significant difference to overall tax claim.

Units as investments often contain more fixtures and fittings than a house which means owners of a unit not only can claim items within strata unit (i.e. lights, carpet and dishwashers, etc).

Unit investors are also entitled to claim their share of the common property. Common property has been identified by the Australian Taxation Office (ATO) as areas within a complex or development which are shared between owners.

This includes areas and items such as:

  • Driveways
  • Pool and pool pumps
  • Outdoor furniture
  • Lifts/fire stairways

The following example compares a unit and a house (using same purchase price, construction date and settlement date), there is a difference of $15,000 in depreciation deductions over first five years of ownership.

Australian Taxation Office tax benefits: The ATO’s legislation recognises quantity surveyors as qualified to estimate construction costs for depreciation purposes.

As a building gets older its items wear out and depreciate in value. The ATO allows property owners to claim this depreciation as a tax deduction. Depreciation can be claimed by any property owner which receives income from their property.

Most investors are aware they can claim deductions on building structures of a unit (subject to age) including plant
and equipment items within such as:

  • Blinds
  • Carpets
  • Ovens
  • Range hoods
  • etc…

Many investors are unaware they can claim on common areas as well. Is it worthwhile for investors to consult a professional quantity surveyor to calculate the most accurate and financially returns for the property investor?

Accountants and real estate agents may on occasion estimate depreciation figures, although these professions lack construction cost knowledge and the capability to accurately determine depreciation deductions available in an investment property.

Most importantly the ATO does not recognise their figures in a tax return.

That’s why consulting a quantity surveyor which specialises in depreciation guarantees you…the investor to get the maximum legitimate deductions available.

A site inspection allows the quantity surveyor to establish maximum number of plant and equipment items within the property which includes measurements, photos and notes are taken to enhance the depreciation report.

If an investor is audited by the ATO, their depreciation claim will be supported by evidence documented at the time of inspection.

A quantity surveyor can determine correct proportion a unit owner is entitled to claim for common property based on criteria such as size, position within development (eg. penthouse or ground floor) and even its view based on relevant building plans.

If you decide to engage a quantity surveyor to complete a tax depreciation report on an investment property, any fee associated with the production of that report is 100% tax deductible.

Buying investment property means you would be in a position to pull equity out of your property(s) now and invest again. Why? Because you can…you also understand the process of paying less tax, plus how the chain reaction happens by continuing to invest.

Buying an Investment Property

Properties with Equity?

How to use equity to buy investment properties?

 

Properties with equity…what is equity? Equity is the difference between what your home is worth and how much you owe on it.

For example, if your home is worth $500,000 and you owe $200,000, you have $300,000 in equity. As you continue reducing the amount you owe on your home or value of your home grows (capital growth), your equity increases. It’s that simple.

Properties with equity and how to get equity to build wealth through property investment. Unlocking equity in your home can be an effective way to assist in purchasing rental property to help build your wealth.

Residential investment properties are a popular investment vehicle providing investment funding in the form of capital growth and rental income…

Properties with equity, what if you’re already a home owner? Firstly, you may not need to provide a deposit to fund the purchase of your next investment property. Imagine if you could leverage and harness the power of your home equity…

Home equity is the difference between your home’s market value and the balance of your mortgage.

buying an investment property with equity
Buying investment property with equity

 

What if you’ve owned your own home for a few years? There’s a good chance you have by default already built-up some reasonable equity (in context to capital growth), and this can be a valuable resource when it comes to buying property investment.

Here’s how it works. Let’s say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements, a lender fund 80% of the property’s market value (potentially more if you are prepared to pay Lenders Mortgage Insurance LMI)…

Meaning the bank lends you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit. This can come from the equity in your existing home.

Let’s say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

Properties with Equity in context to an investor because it means you can access up to 80% of your home equity (without the need to take out LMI), which equates to $100,000 in this example .

Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $100,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders lend to 90% of the property value less the existing mortgage, where lenders mortgage insurance would be paid on the amount borrowed over 80%.

You should note many property investment gurus say it is important to repay the loan on your home as soon as you can.

properties with equity
Properties with equity

 

The equity which is drawn down from your home to purchase an investment is tax effective, however any remaining debt on your home is not. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.

Properties with equity…property you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund other property purchases/buying investment property.

Contact your mortgage broker to help you work out how much equity you can access in your property and how it can be leveraged as a source of funding for your next investment property.

Properties with Equity