Property Investing

Why Invest in Property?

Property has time and time again proved that it is the only safe and reliable method of accumulating wealth. If you look back over the last hundred years property has continued to double in value every ten years, despite wars, recessions and other external events.

Looking into the future it is the only commodity for which there is a guaranteed need. Technology is constantly changing and so it will not be long before we have found other sources of power, fuel, and even replaced oil. However despite technological advancements we will all have to live somewhere. As the population of the world increases, the amount of available land is static but development of property will continue to increase.

An investment property will always return an income. Given today’s tight rental market and the rising prices in homes, more and more people are unable to purchase their first home and consequently rent for longer periods. This increases the return on your investment.

One strategy is for first homebuyers to rent close to their work and buy investment property. This allows first homebuyers to get into the property market, with very little out lay as the majority of the costs are covered by the tenant and through government tax rebates.

How to Invest in Property?

Choosing an investment property is completely different from choosing a home. A home is an emotional purchase based on any number of individual imperatives. An investment property, on the other hand, is simply a business decision to create wealth.

wealth The first step is to narrow down the search to properties that meet your specific financial needs. When setting your search parameters, you might like to consider the following.

The type of property you are interested in
Target areas for investment
Demographic benchmarks
Price — it is important to set a price range that makes re-selling easy.

Type of property

Different types of property carry different risks and returns. Strata title, for example, offers greater depreciation opportunities but generally higher costs, not to mention the burden of dealing with the body corporate.

Your investment plan and gearing perspectives will also have an influence on the type of property you choose. For example, new properties offer greater depreciation allowances, which would be helpful for those opting for negative gearing. For those seeking to maximise their income, older properties may have a lot to offer

To find out exactly what is right for you and your future goals please call us for a free consultation.

Here is how negative gearing works:

Penny, a property investor..

Buys a house and land package for $300,000,
Puts in $50,000 deposit
Borrows the remaining $250,000
The interest rate is 7% or $17,500 per year.

Financial flexibility:

Ongoing costs including rates, water, insurance, maintenance and depreciation allowance are $2600 each year.

After expenses, the property will produce an income of $13,000.

$15,600	-	$2,600	=	$13,000
Total rent	-	Total expenses	=	Total income
Equivalent to a net rental yield of 4.3%.

However, annual interest repayments are $17,500, so she has actually invested $4500 during the year ($17,500 minus $13,000 = $4500).

In this example, the investor can reduce the tax liability on her other assessable income by the investment property’s loss of $4500.

If the investor were on the highest marginal tax rate of 46.5% (including the Medicare levy) this tax deduction would have the ultimate effect of reducing the real loss on the property from $4500 to $2408.

$4500	x	46.5%	=	$2092
Tax Deduction	x	Tax Rate	=	Tax Savings

$4500	-	$2092	=	$2408
Yearly Investment	-	Tax Savings	=	Real Yearly Investment
This is a good saving

If an investor were on a lower rate of tax of 31.5% (including Medicare levy) the after-tax loss on the investment would be reduced from $4500 to $3083.

$4500	x	$31.5%	=	$1417
Tax Deduction	x	Tax Rate	=	Tax Savings

$4500	-	$1417	=	$3083
Yearly Investment	-	Tax Savings	=	Real Yearly Investment
The saving is still quite attractive.

Assuming that this investment property performs worse than the average property has done over the last hundred years. Instead of doubling in value every seven years, as just about every other property has done over that period it double in value every ten years.

Then in this example this investment property would be worth $600,000 in ten years time. This means on average that there would be an increase in capital gains of $30,000 per year, to increase $300,000 over ten years.

$300,000 x 2 = $600,000
Starting value, doubling over ten years.

$300,000	/	10	=	$30,000
Total gain over ten years			=	average increase per year

As you can see the tax saving generated from an investment property makes it quite manageable for the average investor, while the capital gains makes this strategy even more than attractive.

Let us at Wealth With Integrity show you how this method could work for you.