The uncertainty of the past year has led many of us to reassess our financial goals. A recent survey has revealed that buying an investment property is one way people are looking to take control of their financial future.
If you’re thinking about investing in property, it’s important to understand how property investment works, the potential benefits and the risks involved. Here are some of the things to consider before you get started.
The appeal of investing in property
There are many benefits of investing in property. Here are a few of the key reasons why people invest:
If long-term investment is something you are interested in, property investment could be an option. It could, for example, earn you income through tenants and capital growth – if it increases in value when you sell, the profit you make is called a capital gain.
You may also reduce the amount of tax you pay, by offsetting some investment property expenses you have incurred against your income. In addition, by building up equity over time (the difference between how much you owe and what your property is worth) you might use this to buy another property or renovate your existing one.
The potential risks of property investment
Any form of investment has some uncertainty and borrowing to fund an investment property has an added level of risk to it.
- Rental income – rental income is not always guaranteed. There may be times you have a longer gap between tenants due to unexpected repairs or market changes – for example a rise in interest rates if you have a variable rate loan, can affect your disposable income. So it’s important to make sure you can repay any investment property loan you take out, in the event that it doesn’t perform as expected.
- The highs and lows of the market – a rise in home loan interest rates or an underperforming market may affect the value of your property, your mortgage repayments, disposable income and your profit margin.
- Negative gearing – Negative gearing is when the income you get from your investment property is less than the costs of owning the property (mortgage repayments, maintenance costs etc.). It’s usually used as an investment strategy as it can offer advantages like tax deductions, but negative gearing can also have significant disadvantages. It is a loss after all. We recommend you speak to your accountant or tax adviser to explore whether it is an appropriate strategy for you.
- Capital gains tax – Capital gains tax (CGT) can also affect your profit margin when you sell your property – your profit (sales price minus your original purchase price) will be included in your taxable income taxed at your income tax rate. Speak with your accountant or tax adviser to see if you’re eligible for a CGT discount.
Tip: It’s a good idea to do your homework to make sure your investment is the right strategy for your needs. Check out the government’s MoneySmart website for more information on the pros and cons of borrowing to invest or speak to your financial advisor.
An alternative way to buy property
A Self-Managed Super Fund (SMSF) may sometimes be used to invest in a range of assets, including property, and is regulated by the Australia Tax Office. It is a ‘do-it-yourself’ superannuation fund that can have up to four members, but the rules for setting them up and investing through them are complex and subject to change. The benefits can vary according to circumstances, so it’s important to speak to your accountant or tax adviser if you want to explore this strategy for your investment.
Investment loans and how they work
Property investment loans allow you to borrow money to invest in land, houses, apartments or commercial property. These loans work a bit differently to a home loan for a property you intend to live in. As an investment in property may generate income for you, that income may be factored into your ability to pay back the loan. Interest rates are usually higher for investment loans than home loans, as the risks for the lender are higher as well.
How to apply for an investment loan
Traditional lenders have strict eligibility criteria for investment loans. If you don’t meet the banks’ criteria because you’re self-employed or have previous credit issues, here at Ok loans we may be able to help. We help all sorts of people from those with irregular income – like the self employed, through to people who have previous credit issues. The process for applying for an investment loan with us is simple. We encourage you to have a chat with one of our Lending Specialists, so we can understand your situation and find you the best possible solution.
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Disclaimer: It is designed for publication, to provide you with factual information only, and it is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. If you need financial or tax advice you should consult a licensed financial or tax adviser. The information in the article is believed to be reliable at the time of distribution, This is not accredited brokers warrant its completeness or accuracy. For information about whether a non-bank loan may be suitable for you, call us on 0431579459.