Purchasing an investment property has long been popular: being both a rewarding financial move and a beneficial experience. Notably, for all investors – from the seasoned property investor, first timers to the sporadic investor – purchasing an investment property has tips and tricks associated with it. So what are the tips, considerations and strategies you need to know when purchasing an investment property? Let’s take a look at these in today’s article…
Considerations when Purchasing an Investment Property
Houses vs Units
One of the first considerations when purchasing a property for investment purposes, is whether you should buy a house or a unit. Importantly, both have benefits and downfalls. Houses can be easily renovated and redeveloped, further increasing the house’s value, however, they are often more expensive to purchase. Alternatively, units are popular among the younger generation of investors and buyers, but there are strata fees and numerous building restrictions.
Cash vs Growth
Properties with a cash flow tend to have a low capital growth profile and high rental returns. Growth properties are the reversal. While surplus cash flow can assist investors to repay their mortgage loan quicker, there are tax implications. Growth properties however, carry tax benefits such as negative gearing but investors should keep in mind that capital growth is not ensured every year.
Local vs Distant
Many investors choose properties in residential areas that they are familiar with and areas they’ve witnessed grow in value. Advantages of investing locally include the ease to monitor the property, appearance and maintenance duties. There are no inherent problems with investing locally but considering a property in another region also has benefits. These include: diversifying your investments and affordability.
New property vs Old property
With new properties there are more tax incentives which include better depreciation compared to older properties. Also, there is usually less maintenance involved. However, older properties may perform much better long term and can be less affected by oversupply with surges in new building activities.
Strategies when Purchasing an Investment Property
There are also various strategies to consider when purchasing an investment property, as below:
Buy and Hold established Property
A tried and tested strategy of investing in property, buying and holding established property is generally considered low risk with low effort once purchased. The strategy relies on the property growing in value over time and essentially based around relying on the compound growth of the investment property. This strategy is not without its cons; being reliant on the property’s value growing which may not always happen, but it is a very popular investment strategy to be aware of when purchasing an investment property.
An effective way to build an investment property portfolio, the second strategy to look into is positive gearing. It involves purchasing an investment property where the total rental return covers all the expenses and then some. It is a good idea to speak to a member of our team prior to using this strategy as it may attract more tax and translate to slow capital growth.
What is negative gearing? Well, it’s a great strategy that involves purchasing an investment property in a high capital growth suburb, but where the total rental return does not cover all expenses in holding the property. If you’re experienced or have the right guidance, this strategy can work wonders for your investment property. However, if you’re on a low income, the tax effectiveness of this strategy will be significantly reduced and even considered risky.
This is usually a strategy for more seasoned investors. It involves purchasing a large block of land and subdividing it into two block, selling them as two separate lots or holding them for a longer term gain. It can add additional value by splitting up blocks but can be difficult due to council fees, application delays and its time consuming nature.
A Final Word on Purchasing an Investment Property
Investing in property is a risk, so it is always best to seek professional advice to answer all your queries and discuss your individual circumstances or situation. We at The Quinn Group understand there are many aspects to be considered in regards to property investment such as claiming expenses and other tax considerations and obligations. Our team of experienced tax accountants and lawyers can assist you with getting the most out of your investment property.
Speak to our team about purchasing an investment property by submitting an online enquiry or calling us on +61 2 9223 9166 to arrange a teleconference or appointment.
This article has recently been updated and is current as at 31 January 2022.