Investing in Residential Property:

First , let me state clearly that this is Not investment advice. It is general information for discussion purposes, offered with the intention of ‘getting your grey matter turning’. If you are considering any investment, you should always do lots of your own research, including seeking professional advice from licensed, qualified and experienced people.
Second, secure a good accountant.

Property Investment

Investing in property give many people a very secure feeling. It can be profitable when done wisely. It is a less volatile investment and less liquid. That is, it take time to turn you investment into cash.

Australians have a love affair with property ownership, and the most popular form of property investment in Australian is residential property. Villars, apartments, townhouses and houses. Residential property investment is just one of several property investment alternatives. Others include offices, commercial property, like factories and retail property. But this information is a general discussion and we limit ourselves to residential investment property.

Negative Gearing and Positive Gearing

To the uninitiated negative gearing (NG) sound complicated, But its simple. In lay-mans language, a negatively geared investment means it is costing you more than you receive in income i.e. more money going out than coming in. In other words you are losing money. It’s a negative cash flow. The ATO will give you some of your loses back to you as tax deduction. Of course they must be allowable deductions and there are many many more conditions and regulation. But that’s it, in a nutshell. And of course Positive gearing is when you are earning more money that it is costing you, or positive cashflow. Which method you choose depends on many factors. Your decision should be the result of much personal and professional financial analysis.

Capital Gains Tax

In our wonderful system if you earn money, chances are you’ll have to pay tax on it. Most people get pretty upset when they think about paying capital gains tax on the sale proceeds of their investment property. To ease the pain look at it this way. Capital gain is income you’ve earned. Sure its income on an investment property, but it is income to you. But, In most cases, it is likely to be taxed at just half your usual rate. Income taxed at half the rate almost sound like a bargain when you put it like that doesn’t it. Well maybe not a bargain but it does take the sting out of it. And as usual there are all sorts of factors, and ATO regulation and conditions to consider in the calculation. Let your accountant sort that out. But the point here is, "it not all bad". If you have to pay tax, its better to pay half as much.

Property management

Most real estate offices provide an excellent service by marketing for tenants, arranging for rent to be collected, fixing minor repairs and providing a useful summary for tax purposes at the end of the year - but they usually charge around 9 per cent of the annual rent for this service. If you have the time to undertake these services yourself then this can increase your return. But the call upon you, at possibly inconvenient times, can be annoying.

Initial costs

Stamp duty paid to your state government is usually the biggest single additional cost of acquiring a property. Most people feel good doing this, knowing that their stamp duty tax dollars will be carefully and wisely spent by their state government – Not !. Remember to allow for this expense when determining how much you can borrow. Stamp Duty is a capital cost and is added to the cost base of the property where as legal and conveyancing fees are normally deductible if the property is for investment purposes.

On-going costs

Property as an investment has many benefits but it can be an expensive asset to hold. When calculating the return, and make sure that you do calculate it, ensure that you allow for the following:

• 1. Secure a good accountant
• 2. Interest costs on the borrowings.
• 3. Obtain good Landlord Insurance
• 4. Rates both Council and Water rates, and other government taxes;
• 5. Repairs and upgrades. Things do go wrong and need to be repaired or replaced.
• 6. Body corporate fees if applicable..

This list is indicative of the types of expenses you will incur - but there may be others.