Prop­erty in­vest­ment’s big­gest ques­tions an­swered

The Coffs Coast Advocate - - REAL ESTATE -

REAL es­tate in­vest­ment has made many Aus­tralians wealth­ier, but has also stung a few right where it hurts – in their hip pocket.

Would-be in­vestors have plenty of ques­tions to ask them­selves be­fore tak­ing the prop­erty plunge, but three dilem­mas stand out more than most.

Be­fore you think about ten­ants, cap­i­tal growth or colour schemes, con­sider these ques­tions.

BUY NEW OR ES­TAB­LISHED?

This can be a tricky de­ci­sion to make. His­tor­i­cally, es­tab­lished prop­er­ties within 10-15km of city cen­tres have de­liv­ered the best cap­i­tal growth for in­vestors, but these houses are likely to be more ex­pen­sive to buy and come with smaller tax ben­e­fits.

Buy­ing a new in­vest­ment prop­erty or build­ing one usu­ally de­liv­ers a juicy se­lec­tion of tax de­duc­tions such as de­pre­ci­a­tion of fix­tures and fit­tings, and a 2.5% an­nual write-off of the build­ing cost.

The size of the tax re­fund de­pends on your mar­ginal tax rate, but tax should not be the sole rea­son for in­vest­ing.

If you are neg­a­tive gear­ing – where ex­penses ex­ceed in­come to give you a tax de­duc­tion – you are still los­ing money, so aim to be pos­i­tively geared even­tu­ally.

Newer prop­er­ties are more com­monly found fur­ther away from city cen­tres, mak­ing them less ex­pen­sive.

They also are less likely to de­liver prob­lems based on their age, al­though some ex­perts ques­tion the qual­ity of mod­ern con­struc­tion com­pared with homes built a cou­ple of decades ago.

HOUSE OR UNIT?

Years of speak­ing with many prop­erty in­vest­ment ex­perts – plus per­sonal ex­pe­ri­ence – have made me a land fan.

Apart­ments don’t stack up against a nice slice of dirt, in my view. That’s be­cause the only part of a prop­erty that ap­pre­ci­ates in value is the land com­po­nent.

Build­ings lose value, which is why we’re al­lowed to de­pre­ci­ate them, and if you own an apart­ment in a 10-storey build­ing you’re shar­ing your piece of land with nine other floors. Apart­ments also come with ex­tra costs such as strata fees, and their prices fluc­tu­ate more than houses.

For ex­am­ple, apart­ments in Bris­bane and Mel­bourne are cur­rently un­der pres­sure and many ex­perts pre­dict their price to fall this year.

De­spite the anti-apart­ment views of many prop­erty spe­cial­ists, they’re still pop­u­lar with buy­ers, can de­liver good growth for those with the right tim­ing, and may be the best move for an in­vestor who may want to dou­ble up their prop­erty as a per­sonal hol­i­day home or other ac­com­mo­da­tion.

IN­TER­EST ONLY LOAN OR PRIN­CI­PAL AND IN­TER­EST?

This is the only ques­tion that has a clear an­swer. If you have other per­sonal debt, al­ways choose an in­ter­est only in­vest­ment loan un­til your per­sonal debt is cleared.

That’s be­cause in­vest­ment loans are tax de­ductible, so that 5% you’re pay­ing on the prop­erty loan is ef­fec­tively cost­ing you just 4, 3 or even 2.5% de­pend­ing on your tax rate.

Per­sonal debt such as mort­gages or per­sonal loans is not de­ductible, so you pay the full in­ter­est rate on the loan, and that’s af­ter your gross wage or other in­come al­ready has been taxed.

Ac­coun­tants and in­vestors al­most al­ways rec­om­mend pay­ing off per­sonal debt be­fore tack­ling in­vest­ment debt, but once you’re left with only in­vest­ment debt, pay that off too.

PHOTO: KENTWEAKLEY

PHOTO: ALEXRATHS

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