Property Investment Frequently Asked Questions
How do I know where to invest?
The macro factors that allow an area to go up in value are all based around people, supply and demand. In short, if there are more people demanding housing in an area than what may be readily available, their demand will drive prices higher.
What are the ingredients to a healthy market ?
When the supply and demand equation is mixed with these ingredients to a healthy market, massive price growth can be expected. When there is increased Government and Corporate sector spending on large-scale infrastructure, like:
- Education (Universities, schooling, child care)
- Transport (Extensive road networks, brand new train lines)
- Retail / Shopping (New department stores, town centres)
- Medical (New specialist medical centres, Hospitals)
- More and higher paying jobs will be created. These higher paying jobs will equal increased borrowing capacity of the people that live there, which places upward pressure on house prices.
Accordingly, with more jobs and growth potential in a region, more population growth will occur, which places even more pressure on demand. Over time, the availability of suitable housing and vacant land will decline. Eventually, supply will be very low and demand will continue to rise - then we have a booming market!
Isn’t debt a burden?
Traditionally debt has been perceived as a burden. But it is important to remember that there are many types of debt. Not ALL debt is to be avoided and not ALL debt is ‘bad’. There is very little in this world that appreciates in value. For instance, we know that cars, boats and jet-skis depreciate very quickly. The overuse of credit cards for luxury items and consumables has certainly become a worrying social trend. Any debt toward these items is known as ‘bad debt’.
In contrast, on average, a residential property doubles in value every seven to ten years. Therefore residential property is described as an appreciating asset. In addition, as property values rise, so do rental returns. Borrowing for investment is a necessary tool to build wealth and is known as ‘good debt’. It’s one of the few instances where the debt actually works for you.
How much do I need to save to invest in property?
Generally, you need approx $65k of cash or equity to get started in property investing. This amount will allow you to acquire a $450,000 brand new property and cover the 10% deposit and associated costs (stamp duty, lender’s mortgage insurance and legal fees).
What if I don’t have a cash deposit?
When you think of a deposit, most of you think of cash that is required upfront to purchase a property. Cash is not necessary when you have equity in your own home or another property within your portfolio. That property is then used as security against a ‘deposit and costs’ investment loan to acquire a new property.
For home-owners that are first time property investors, they may be an initial concern of using existing equity. This is a perfectly natural outlook. After all, your home is your most important asset, right?
In reality, using the equity in your home to purchase another residential property is considered to be conservative. There is a great and very true saying - ‘no-one ever got rich, without getting into (good) debt’.
For those just starting their property journey, another option is to approach your parents (or another family member) to request they take out a small equity loan from one of their properties, and gift this short term deposit and costs funds to you. Once your new property goes up in value enough, you can access that equity and repay the deposit and costs loan.
Why does Axon Property Group recommend building brand new properties for your investment?
There are five key reasons to acquiring a brand new property:
- Depreciation - you receive a higher rate of depreciation on new properties than established properties meaning a better tax return for you, with increased cash flow for each property.
- 12-months Builder's Warranty - if there are any faults in your property during this time the builder will repair them free of charge.
- Longevity of the property - properties are built to last 25 years so having a new property will reduce your ongoing maintenance costs.
- Better Tenants - brand new properties attract better quality tenants who are more likely to look after your property.
- Stamp Duty is reduced when you build a brand new property, as you only pay stamp duty on the land - not the house (as the house does not exist).
Our property specialists can readily explain each of these benefits to you in depth if you would like further information.
Does the builder have construction insurance?
Yes, we ensure all builders we work with are fully licensed and have all their insurances up to date. These insurances are required by the bank before construction commences.
What if I get bad tenants?
We strongly encourage you to invest in Landlords Insurance to cover the cost of tenant related problems.
What if I already have a mortgage?
In all likelihood your home is worth a great deal more than your mortgage. Still having a mortgage is not a problem; instead, it is actually an opportunity and a tool to increase your wealth with an investment property.
Most people don’t realise that their family home is considered “equity” even if it is not fully paid off. You can use your equity to raise the deposit finance to purchase one (or more) investment properties, including all the usual start up costs such as conveyancing fees and stamp duty. Banks view property as a good investment and willingly provide finance for it, especially when using the security of your own home.
It is essential to investigate your mortgage options. We serve you with a mortgage broker who can look at your current situation and ensure you are getting the best value on your current mortgage and financing of your investment property.
What if I lose my job?
When confronted with an important financial decision, a common reaction is to think about the impact of losing your job. It’s the “worst case scenario”. The rational approach is to sit down and consider the likelihood of either you or your partner becoming permanently unemployed.
In life there are no certainties. While the worst case scenario is unlikely to come to pass, the careful investor puts away spare cash regularly to provide a buffer against the effects of such a misfortune.
We also recommend you invest in four key insurances to cover you: Income Protection, Trauma and Recovery, Total and Permanent Disability, and Life Insurance. We have access to a top Financial Planner who can help you set up your finances in a way that protects you and your family in the event of loss of employment. Most of these insurances can be paid from your Superannuation fund.
An extra account or income insurance leaves you free to take your time and find the job you really want. You also want to ensure your property is paying for itself so loss of income won’t impact on your investment portfolio.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is payable on the capital growth of your investment property in the event that you sell the property. It is only payable once you have sold it. In 1999 a new method of calculating CGT was introduced. It is now calculated at 50% of your marginal tax rate. Previously it was calculated at a rate of 100%.
Since your tax assessment is based on your marginal income tax rate at the time of sale, any tax payable would be reduced if you are retired or have a small income. In addition, your capital gain is further reduced by deducting both the purchase costs and selling costs such as stamp duty, legal fees and agent’s selling fees.