Property investment’s biggest questions answered
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.