First
Home
Property
Buyer’s
Investing
Guide
Guide
Contents
Why invest in property? ...................................................... 3
Choosing an investment property ...................................... 6
Choosing an investment loan ............................................. 7
Managing your investment ................................................. 9
Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a partly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124
AFSL and Australian Credit Licence 234945. © 2014 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786. Aussie does not provide
any financial or investment advice. This document has been prepared as a factual guide only. It does not take account of your objectives, financial situation
or needs. Aussie recommends that you seek independent financial advice and obtain your own professional legal and taxation advice before making an
investment decision.
Page 2 | Aussie Property Investing Guide
Why invest in
property?
Historically, property has always increased in value over
time. While there may be dips and plateaus, if you’re in it
for the long term, it is generally considered one of the more
solid, less volatile forms of investment1. Investors tend to
like property for its potential:
•
Capital growth (increase in value)
•
Ongoing rental return
•
Tax benefits
You don’t need a big salary to get started...
Lenders consider the potential rental income you’ll get from
the property when calculating how much you can borrow.
So property is a viable investment option, whether you’ve
bought before or it’s your first time.
If you already own your home, and have a reasonable
amount of equity in it, you may not need to raise any cash
to start investing. Many lenders may let you use that equity
as a deposit for the investment property as long as you can
comfortably manage the repayments on the loan.
But if you don’t already own a property don’t be put off. If
you have a deposit saved, an investment property might
be a good way to get into the property market and earn a
regular return on your investment.
The return on your investment
As a property investor you can expect to earn two quite
distinct types of returns:
•
Capital growth – It’s where the value of the property
rises over time allowing you to make a profit on the
sale of the place
•
Rental income – Ongoing rental income you’ll be
entitled to during the rental period or your investment
property
There are a few important points to note about capital
growth and rent:
1. Firstly, in order to make capital gains on the property,
it will need to rise in value by more than the costs
of buying and selling the place. These costs include
stamp duty, legal fee and agent’s selling commission.
2. If you select a well-located property in an area
experiencing population growth, there is a good
chance you will make a capital gain if you are prepared
to hold onto the property for the long term2. But there
are no guarantees when it comes to capital growth
especially if you only intend to own the property for a
short period.
3. Rental income on the other hand is far more certain.
Once a tenant signs a lease they are committed to
paying rent – at least for the duration of the lease term.
4. It is unusual for a property to deliver both high rental
yields (that’s the annual rent as a proportion of the
property’s market value) and strong capital growth
over the same period.
5. The trade-off between rental yield and capital growth
makes it important for you to consider an investment
strategy before you even start searching for a property.
1 MoneySmart.gov.au https://www.moneysmart.gov.au/investing/property
2 Institute of Actuaries in Australia, A house or a home? Finding value in Australian residential property, 2011 page 3 http://www.actuaries.asn.au/library/events/
Conventions/2011/Con2011_Paper_Street.pdf
Page 3 | Aussie Property Investing Guide
There are two types of strategies to consider:
Capital growth
•
Pros
Cons
Examples
Rental income
The potential for healthy gains in the
long term. As a guide, in the 10 years
to February 2014, dwelling values
nationally rose by an average of 4.4%
across Australia’s combined state and
territory capitals3
•
Low repayments with more rental return
•
Rental income may equal or even exceed
the mortgage repayments, which helps
with cash flow
•
Depending on the area, it can also have
potential for capital growth
•
The tax relief that comes with
”negative gearing”*
•
Other investors have over-extended
themselves and been forced to
sell at a loss
•
Profit when you sell might not be as great as
it could be for a different type of property or
a different location
•
The loan repayments may be more than
the rental income and your cash flow
needs to be able to handle this outgoing
•
Higher cash flow and high yielding
properties means that you may pay higher
tax on the income
•
A 2 bedroom inner city unit might cost
$650,000 to buy, but attract a rent of
around $550 per week - a return, or
“yield**”, of about 4% a year. However
after five years the property may have
risen in value to $800,000 – giving you
23% capital growth
•
A 2 bedroom unit in the suburbs might cost
only $300,000 but will get tenants paying
$400 per week - a yearly return of around
6.5%. However after five years the property
may only be worth $330,000 – giving you
10% capital growth
Additional costs to consider
When selecting your investment strategy and what you
can afford to spend, you should also consider the potential
costs of ownership:
•
Interest repayments – If you get a variable loan, factor
in higher repayments if rates go up
•
Council rates and strata fees – The agent will tell you
what these are per quarter but if you’re buying a unit
get a strata search so you’ll know if there are any big
special levies in the pipeline
•
Repairs – If it’s a house you’ll be up for all the building
repairs, but even in a strata block you’ll be responsible
for repairs to fixtures and fittings and any whitegoods
and appliances you include with the flat
•
Management fees – If you have the time and
the inclination you can manage the property
yourself, but if you use a managing agent, you will
be charged management fees – usually set as a
percentage of the rent
•
Vacancy periods – When doing the sums, factor in
vacancy periods when you won’t receive rental income.
Allow at least four weeks of vacancy each year
*Negative gearing is when a rental property is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the
interest on the borrowings (Australian Taxation Office https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail/Publications/Rental-properties-2013-14/?page=16. The
federal government offers you some tax breaks when this happens. To find out more go to 'Tax and your investment property'.
3 RP Data-Rismark February Hedonic Home Value Index Result, 3 March 2014 (http://www.corelogic.com.au/media-release/housing-market-pauses-in-february).
**The property’s “yield" is a measure of its return. Very simply it’s the percentage of the annual rent a property generates calculated against its market value. For example, if a
property worth $500,000 commands annual rent of $25,000, its rental yield is 5.0%. To best work out your actual ‘net’ (after expenses) return, you need to calculate the money
received into your bank account after all costs are sorted.
Page 4 | Aussie Property Investing Guide
Don’t overlook insurance
Landlord Insurance~
Buying an investment property is exciting – there’s also a
lot to plan for, and it’s important to remember that as soon
as you pay a deposit on your investment property you are
responsible for the property whatever happens. That can
be a scary thought but the good news is that it is easy to
manage risk by making sure you have the right insurance
in place. Let’s look at two main types of cover property
investors need to have on board.
As an investor it is important to cover yourself against
major financial losses from events such as fire, theft and
storm, and be protected against tenants who don’t pay the
rent or cause damage to your property. When reviewing
your insurance needs make a list of the key items you
require including cover for rental property fittings
or furniture.
Mortgage Protection Plan^
You owe it to yourself to decide the best way to protect
you and your mortgage - and investment - should the
unexpected happen.
Mortgage Production Plan is a life insurance product that
provides peace of mind if the unthinkable should happen.
Importantly, it includes cover for you and your property
loan, taking care of some or all your mortgage payments if
you become too ill to work, or if you pass away.
Aussie offers the Aussie Mortgage Protection plan that
provides cover for:
Aussie offers competitively priced landlord
insurance† featuring:
•
Protection against fire, theft, storm, impact,
flood and more
•
Ability to add contents insurance to your policy to
cover your property if partly- or fully-furnished
•
Optional Tenant Default Cover
•
Optional Theft and Malicious Damage by Tenant Cover
•
Save money with 25%# off when you purchase a
combined landlord and contents policy
You can even choose to pay premiums monthly,
fortnightly or annually.
•
Critical illness including 11 serious specified
medical conditions
•
Loss of life and terminal illness
To find out more or apply online visit
aussie.com.au/home-insurance.html and talk to an expert
Aussie Mortgage Broker.
•
Involuntary unemployment in the first 12 months
of cover
And the risks
To find out more about how to protect your lifestyle with
the Aussie Mortgage Protection Plan visit
aussie.com.au/mortgageprotection and talk to an expert
Aussie Mortgage Broker.
As with any investment there is no guarantee that you
will get a healthy return on your property. Property
prices can drop and good tenants can be hard to find.
Do as much research as you can before buying your
investment property.
^
Aussie Mortgage Protection Plan is issued by MetLife Insurance Ltd ABN 75 004 274 882 AFSL 238096 of 2 Park Road Sydney NSW 2000 (MetLife) (Death,
Terminal Illness & Living Benefit) and ACE Insurance Ltd ABN 23 001 642 020 AFSL 239687 (ACE) (Involuntary Unemployment Benefit). It is distributed
by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSL 226403 (ALI) and is promoted by AHL Investments Pty Ltd ABN 27 105 265 861
(Aussie) as an Authorised Representative AR 338358 of ALI. Any advice in this material has been given without taking into account your personal objectives,
financial situation and needs. Please consider these matters and the information within the Product Disclosure Statement (348KB) and Financial Services
Guide (156KB) before deciding on this product. ALI may be paid a portion of the premium as commission from Metlife or ACE for each policy purchased.
Aussie may receive a portion of the commission from ALI and may pass a proportion of this commission to your Aussie Broker. Your Aussie Broker may also
become entitled to other non-monetary incentive rewards.
~Aussie Home and Contents Select Insurance is issued by Auto & General Insurance Company Limited (AGIC) ABN 42 111 586 353 AFS Licence No 285571. It
is distributed by Auto & General Services Pty Ltd (AGS) ABN 61 003 617 909 AFSL 241411 and is marketed by AHL Investments Pty Ltd (Aussie) ABN 27 105
265 861 as an Authorised Representative AR 338358 of AGS. Aussie may receive a commission from AGS for each policy purchased.
This is general advice only, and does not take into account your particular financial situation or needs. You should consider your personal objectives, financial
situation along with the Product Disclosure Statement Part A, Product Disclosure Statement Part B and Financial Services Guide before deciding on this
product.
†
Online discount offer only applies to the premium paid for a new Aussie Home & Contents Select Insurance policy initiated on or after 1st June 2014 and
purchased online. We reserve the right to shorten or extend the period the discount is offered and vary the amount of the discount. Base rate premiums
subject to change. It does not apply to any renewal offer of insurance. The discount offer applies only to the premium for an insurance product. It does not
apply to the fees that we may charge you. (These are described in our Financial Services Guide, which is available at aussie.com.au/insurance).
#
Aussie is a partly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. The Aussie name and logos are trademarks
of Aussie.
Page 5 | Aussie Property Investing Guide
Choosing an
investment property
One of the great things about investing in property is that
you should ideally have no emotional connection to the
place you buy. That’s quite different from choosing your
own home where aspects like a building’s character or a
charming garden or proximity to friends, family or work can
be the main drawcards.
Rental Income
On the other hand, if you’re looking for a good rental return
and a steady cash flow consider buying in the suburbs or
regional centres. Prices in these areas tend to be cheaper
so you’ll get a better rental yield.
In both cases, there are some general things to keep in
mind when deciding where to buy:
Try to avoid places on busy roads or directly
under flight paths
Waterside suburbs appeal to both renters and future
buyers and they tend to at least hold their value
When you’re buying as a landlord it should be easier to
take a more pragmatic approach to property – location and
the tenant appeal of the place should be two key aspects
to consider though this will vary depending on whether
you are adopting a capital growth strategy or a rental
income strategy.
Look for locations with access to employment, public
transport, schools and shops
You don’t have to buy somewhere close to where you
live but you need to be familiar with the pros and
cons of a location
The main point is to set your emotions to one side in the
buying process. Bear in mind that this is a money-making
venture, so buy with your head – not your heart.
Keep an eye on vacancy rates, sales prices
and rental rates
Capital Growth
If you’re looking for a place with potential for capital
growth, it’s worth aiming for a property close to the CBD,
because scarcity and demand will ultimately push values
up. As a guide, in the 12 months ended September 2014
combined state and territory aggregate capital city values
rose 9.3% compared to an increase of 3.3% in ‘rest of
state’ values4.
Look at the interest in the area, the current population
growth and the projected population growth
There are lots of websites out there to help you keep up to
date with property market statistics such as RP Data.
There are many of types of property to consider, but most
Australians opt to invest in residential property because
that’s the type they know best. If you plan to go residential
you’ll need to decide between a unit and a house.
Deciding between a unit and a house:
Unit
•
They tend to be cheaper and therefore
can provide a higher yield
•
The extra land value can provide a greater
chance for capital growth
•
The upkeep is managed by a strata
company and if things go wrong,
certain costs may be split between all
the strata owners
•
There is good chance of finding a tenant
as there are lots of families interested in
having some extra room
•
•
They are usually well located and close to
amenities which appeal to investors
More likely to be able to
renovate to add value
•
Strata costs
•
Can be costly to maintain
Pros
Cons
House
4 http://www.corelogic.com.au/resources/pdf/indices/2014-10-01--rpdata-rismark-home-value-index.pdf
Page 6 | Aussie Property Investing Guide
Other things to consider when buying an
investment property
There are two types of loans that tend to be particularly
attractive to investors:
Look for properties with features that will appeal to
as many people as possible e.g. second bathroom,
balconies or lock up garage
•
Interest only loans
•
Line of credit loans
Look for a property that will attract more than one
segment of the rental market such as singles, couples,
professionals, families or retirees. The needs of each
segment will vary
Interest only
Renovation can be costly but it should only be done if
you think it will increase the value of the property
If the tenant complains about a fixture not working, it
will need to be fixed
Find out if the place was rented in the past: how much
it was rented for, if there were any vacancy periods,
how long it was vacant for, and why, and whether
there has been a high turnover of tenants
To find out what is popular in the area you are looking at,
talk to local rental agents and ask them about the types of
properties in demand.
Choosing an
investment loan
Property investment loans are not too different from regular
home loans. As with other loans you can choose between:
Variable interest rate – Here the rate you pay
fluctuates typically in line with changes to the official
cash rate. This type of loan tends to have a range of
flexible features like redraw however as investors can
usually claim the loan interest as a tax deduction there
may not be much incentive to pay off the loan sooner.
So the features of a variable rate loan may not appeal
to investors as much as they do to owner occupiers
Fixed rate – A fixed rate is often very useful for
investors as it provides certainty of repayments.
This can be helpful because the rent payments on a
property will be fixed during the lease term, and even
if market interest rates rise the landlord may not be
able to raise the rent until the lease expires. By locking
into a fixed interest rate investors have more certainty
about the repayments on their property and a more
manageable cash flow
With most standard home loans your repayments are made
up of interest charges plus a small repayment of the loan
balance. In this way you slowly chip away at the original
amount borrowed over the term of the loan.
Where an interest only period is present the loan
principal remains the same unless you choose to make
additional payments. You only have to pay the original
amount borrowed if you sell the investment property. It’s
worth noting that most lenders only permit interest only
repayments for a set period – often between five and
ten years. After this you will either need to renegotiate
another interest only period or start to make principal plus
interest repayments5.
Interest only loans can be useful for investors because
during the interest only period:
Your monthly repayments are less than they would be
if you were to pay off principal as well
You can get a tax deduction for the interest payments,
but not for principal repayments
Line of credit
If you already own a property, a line of credit offers
a way for you to tap into any equity you have built
up in that property and, use it as a deposit for your
investment property.
This type of loan is useful for investors because:
A line of credit loan allows you to draw from a fixed
amount at any time to pay for any additional expenses
It’s kind of like a credit card with a big limit but the
equity in your home acts as security for the loan
Split rate – Like home owners, an investor can
choose to split their loan between fixed and variable
rate components
5 https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/choosing-a-home-loan#principal
Page 7 | Aussie Property Investing Guide
Deposit Power Guarantees*
Tax deductions6
A Deposit Power Guarantee can be used as a substitute for
a cash deposit when purchasing a residential investment
property. You can choose to use a Deposit Power Guarantee
for all - or just part - of your deposit, up to 10% of the
purchase price.
As a landlord you can normally claim a tax deduction for a
wide range of the expenses related to your rental property
including interest on the loan. It should be noted that these
expenses can usually only be claimed if the property is
tenanted or available for rent.
This makes a Deposit Power Guarantee a handy option
because you can still sign a contract to buy the property of
your choice when you find it.
Your tax adviser can give you a clear picture of what
you can claim for your personal circumstances. Though
in general the following expenses can normally be
claimed on tax:
As long as you have the funds available at the time of
settlement, a Deposit Power Guarantee puts you in the
position to secure the right property including the deposit.
Using a Deposit Power Guarantee doesn’t remove your
obligation to pay the deposit; it just delays payment of the
deposit amount until settlement, and allows you to hold on
to your funds for a bit longer.
If you feel a Deposit Power Guarantee could be helpful for
your circumstances, talk to an expert Aussie Mortgage
Broker about how to apply.
Your expert Aussie Mortgage Broker
can help
With so many loan options available it is important to have
the loan in place that best suits your needs and investment
strategy. That makes it worth speaking with an expert
Aussie Mortgage Broker who can look through hundreds of
investment loans offered by a wide range of lenders to help
you make the choice that is right for you.
Tax and your investment property
Investments should always be selected on the basis of the
returns generated and how well the investment will help
you meet your individual goals. However property investors
can tap into some very useful tax benefits. These include
the ability to claim a tax deduction for many of the costs
of owning a rental property; the tax benefits of negative
gearing; and the availability of capital gains tax discounts.
Let’s take a closer look at how each of these tax benefits
can work for investors.
Advertising for tenants and property management fees
Loan interest and ongoing loan fees
Council rates, land tax and strata fees
Building depreciation plus depreciation of fittings and
fixtures like stoves, carpets and hot water heaters
Repairs, maintenance, pest control and gardening
Building and landlord insurance
Stationery, phone costs and any travel to
inspect the property
Accounting or bookkeeping fees
The above is not a full list of what you can claim. Always
get proper advice from a tax expert before putting
in your return.
Negative gearing
“Negative gearing” refers to the situation where the costs
of owning your rental property exceed the rental income.
The difference, which represents a loss, can normally be
offset against your other income like salary and wages.
So, say your income is $60,000 a year but your property
expenses are $15,000 a year, you’ll only need to pay income
tax on $45,000.
This way you’ll pay less tax, but don’t be mistaken, it is
still a loss that hopefully will be more than made up for
by an increase in the property’s value over time. Do note
capital expenses like the repayment of your loan principal
or renovations that add value cannot be claimed as an
ongoing tax deduction7.
The main advantage of negative gearing is that it makes
a rental property much more affordable as the tax savings
can be substantial.
Investment properties don’t have to be negatively geared.
If the rent outweighs the costs of owning the property, it is
said to be ‘positively geared’ and you can expect to pay tax
on the profit the property generates each year.
*This content has been prepared by Deposit Power Pty Ltd ABN 49 160 226 442, which acts as Authorised Manager for CBL Insurance Limited RN1700423 of Level 8, Tower
One, 51 Shortland Street, Auckland, New Zealand, the issuer of the Deposit Power Guarantee. Deposit Power is distributed by AHL Investments Pty Ltd ABN 27 105 265 861
(Aussie). Aussie is a partly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Aussie does not accept any liability for, nor guarantee
payment of any claim or benefit in respect of Deposit Power Guarantee. Aussie receives a commission from CBL Insurance Limited and may pass a proportion of this
commission to your Aussie Broker. Your Aussie Broker may also become entitled to other non-monetary incentive rewards.
6 ATO Rental Properties 2013 http://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind00342353n17290613.pdf
7 ATO Rental Properties 2013 http://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind00342353n17290613.pdf
Page 8 | Aussie Property Investing Guide
Capital gains tax
The time may come when you choose to sell your
investment property, and if you make a profit on the sale
you are said to have made a “capital gain”. This gain is
taxable - the profit is added to your regular income in the
year you made the sale, and the tax will be determined
accordingly. However there are important capital gains tax
concessions available to property investors.
Firstly, the cost base used to calculate the capital gain
includes the price you paid for the property plus buying like
stamp duty and legal fees. Selling costs like agent’s selling
commission can be taken into account also, which helps to
reduce the profit for tax purposes.
In addition, if you have held onto the property for over 12
months you may be entitled to claim a 50% discount on the
capital gain at tax time. Put simply, if you made a profit of
$100,000 on the sale of the place but you have owned it for
over one year, you may only pay tax on a profit of $50,000.
This represents a significant saving of tax for investors
and it offers a good incentive to own the property for
the long term.
Managing your
investment
As a property investor you can choose a hands-on approach
and manage the property – and the tenant, yourself.
Or you can opt to use a professional property manager.
It’s a decision you need to weigh up carefully because
while a DIY approach can be a money saver, there are
also important legal responsibilities you must meet as a
landlord, and it is critical to get these right.
A professional property manager will usually charge
a management fee set as a percentage of gross rent
though this is normally negotiable. In return for this, the
manager will take care of the majority of work involved in
running the property.
These duties may include:
Advising you of the appropriate rent to charge
Securing quality tenants (often for a separate letting
fee), which involves:
•
Advertising the property to let, organising
‘Open for inspection’ viewings, taking tenant
applications, checking tenant references and
interviewing tenants
•
Drafting a formal lease agreement
•
Lodging the rental bond with the appropriate
agency in your state or territory
•
Organising a written report from the tenant
confirming the condition of the property prior to
the start of the lease
Collecting rent on a regular basis and chasing
up late payments
Dealing with tenant requests for property repairs
or maintenance
Providing monthly and annual statements for your
tax return detailing the rent received and the total of
associated property costs
Dealing with difficult tenants including attending any
tenancy tribunal hearings on your behalf
The bottom line is that some investors get a great deal of
satisfaction from managing their own rental property. But
if you are a first-time investor or you are pressed for time,
it can make sense to use a professional property manager.
For the management fee that you pay, you’ll have the
benefit of a hassle-free investment and you won’t have to
deal directly with your tenants, which is the option many
investors prefer.
Page 9 | Aussie Property Investing Guide
Why Aussie?
Buying an investment property is an exciting step! As
a landlord you’ll be building wealth in a proven asset –
residential real estate. Just as it’s worth taking the time
to choose the right rental property, it’s also important
to select the loan that helps you make the most of
your investment.
Choose from up to 20 lenders...*
Meet with an expert
Aussie Mortgage Broker
An expert Aussie Mortgage Broker will compare hundreds
of loans from a panel of lenders including the big banks, to
find the deal that’s right for you.
Here’s how an expert Aussie Mortgage Broker can
help you:
Aussie Mortgage Brokers could help you negotiate a
better home loan deal with your existing lender, which
means you don’t have to switch
Aussie Mortgage Broker can save you time by
searching and comparing hundreds of home
loans in minutes
Aussie’s Mortgage Broking service is at no cost to you
Aussie has an extensive network of mobile Brokers
that can come to you, anywhere and any time that's
convenient for you
There is no charge for an appointment with Aussie,
we get paid a commission by the lender so you're not
out of pocket
Aussie Mortgage Brokers may be able to get better
interest rates for you due to the volume of business
they generate with banks and other lenders
Award Winning Mortgage Broker
Or, choose an Aussie loan
Aussie has a great range of loans. It lets you
take advantage of:
A wide choice of variable and fixed rate options
No ongoing management fees
A choice of fortnightly or monthly repayments
Free additional repayments
Unlimited free online redraw on variable rate loans
Online account management
Talk to Aussie today.
Call 1300 44 55 66
or click here to request your
free appointment.
*Not all lenders lend in every state or territory.
Page 10 | Aussie Property Investing Guide