A foot in the door

BEFORE diving into purchasing an investment property, we need to think about a lot more than just location, location, location.

We need to have a clear investment plan before tackling the real estate section of the paper or searching online.

Personal Wealth Advisers principal Cameron Howlett told SuperLiving the first thing we need to think about is if we can afford an investment property.

“You need to think about it on a cash flow perspective, if there is a loss of job, or if there will be any circumstance where you can’t pay the loan,” he said. “Secondly, people need to think about what kind of structure the property should be owned in. Should it be a self-managed super fund or in your personal name?”

So, we need to think about our financial situation. “It’s not going to be a general thing for everyone. If you have equity in your property, you could use part of it as a deposit on the investment property.”

The interest on the debt of our investment property in most cases is a tax deduction, which could offset the rental income we get.

At the moment, it is attractive to purchase investment properties within self managed super funds. “Depending on the client’s circumstance and age and circumstance, it could mean they get a tax deduction via a salary sacrifice arrangement,” Howlett said.
“Secondly it meant that if you are over 55 [years old] and the property is in a super fund and it is in pension phase, when the property is sold you will pay no capital gains. This is as opposed to if the property were in an individual person’s name, as they will end up paying a personal tax rate of up to what the tax rate is on the capital gain.”
 
The investment needs to meet our goals and objectives. Are we after an investment that will generate a good income or capital growth? “For example at the moment some investment properties in capital cities are not paying a good yield, and you would really be buying it for capital growth,” he said. “And if you are only looking at capital growth sometimes land could be a better option as it is more valuable than the building.”

Meanwhile, Terri Scheer Insurance general manager Carolyn Majda advised property investors to have a clear investment plan before they start looking at the real estate section of the paper.

A tenant for the property we are planning to buy could make or break our experience as a landlord.

“When choosing a property to invest in, think about the tenant demographic you want to attract, for example a family, sole tenant or couple and choose a home that is likely to appeal to them. Properties that are close to schools, shops and public transport are likely to be sought after and may give you a larger pool of prospective tenants from which to choose,” she said.

A property that does not require much maintenance is a great option for both the landlord and the tenant, as it minimises the upkeep required for the home.

“Look for properties that are free from safety hazards such as large trees in the backyard, as it can give rise to legal liability claims if someone is injured by debris at the property,” she said. “Homes with hard flooring rather than carpet make good rental properties because it’s easier to clean.”

Meanwhile, outdoor areas that are paved also require minimal gardening by the tenant.

Think about how we would like to live. If you would not live in a filthy, poorly maintained house, then why should your tenant.

“If you are planning to renovate a property before renting it out, consider painting the property using washable paints and installing hard flooring. Presenting a clean, tidy and well cared for property will encourage tenants to treat the property as if it were their own. They may also be more likely to pay their rent on time and stay in your property longer.”

Risk management needs to be attended to as soon as possible. “Too many property investors overlook risk management until after the tenants have moved in and something goes wrong,” Majda added.

Howlett said one of the mistakes people made was not costing the purchase of their investment property properly. When things go wrong with the property we will need the funds to be able to fix the problems.

It is also important for us to have landlord insurance for our investment property to cover the risk of accidental or malicious damage, loss of rental income or any potential legal liability. This insurance can be claimed as a tax deduction against your income.

A good property manager makes all the difference. Not only can they help secure good tenants, but they can also assist in making sure any maintenance requests are taken care of and the property is well cared for.

“This is particularly relevant if you are thinking about investing in an area that is far from where you live, or if you cannot commit significant amounts of time to manage the property yourself,” she said. “While the total costs associated with appointing a property manager vary, landlords are generally required to pay an upfront letting fee that might be around eight to 11 per cent of the rental income.”
“While these costs may be tax deductable, it is a good idea to subtract these costs from expected rental income while looking for a property to ensure you can still comfortably cover your mortgage repayments.”