5 things to consider before buying an investment property

Thinking of buying an investment property? Whether your motivation is building wealth, planning for retirement, or helping your kids get into home ownership, investing in property calls for careful planning and research. Here, we provide 5 tips to help you start your journey.

It’s a cliche, but for good reason. Location can determine many things: affordability, lifestyle, capital growth, resale value and of course, market demand. Take time to get familiar with different areas, looking for places with high-growth potential, increased rental yield and low vacancy rates. You’ll also want to consider:

• any future infrastructure projects that could make the location more or less attractive 
• school catchment zones, if you plan on renting the home out to growing families
• local crime rates and safety considerations that can impact housing desirability. 

Be thorough and don’t just limit your research to the keyboard. Explore the suburbs, attend auctions, and get a feel for the local market and community.

When it comes to property investment, you’ll want to consider the costs associated with buying and selling property, as well as the cost to own and maintain property. 

Costs to buy and sell can include:

• Stamp duty fees and transfer costs
• Conveyancing and legal fees
• Agent and advertising fees
• Building and pest inspections.

Costs to own and maintain:

• Council and water rates
• Land tax
• Home insurance for landlords  
• Body corporate/strata fees for apartments and other lots
• Property management fees
• Repairs, upgrades and general home upkeep.

The following information is to help you understand what kind of things to look out for, and what you may need to research further. It should not be considered as financial or tax advice and may not be applicable in certain circumstances. 

Understand how capital gains tax works

Capital gains tax (CGT) is the tax you may be liable for when you sell or dispose of certain assets (in basic terms, you stop being the owner of an asset, such as an investment property). When you dispose of certain assets, you’ll need to make this known in your tax return. If you have a capital gain, the tax you’ll need to pay will increase. If you have a capital loss, you can offset it against and capital gains in the year they occur, or future years, to reduce the tax you pay.

If you’re thinking of selling an investment property, seek qualified tax advice to understand the impact this may have on your tax obligations and commitments.

Keep your rental property records up to date 
 
In order to claim tax deductions, you’ll need to produce evidence of your rental property income, running expenses and capital expenses (for future CGT calculations).  When you sell your rental property you’ll need to have evidence of the purchase price and associated purchase costs, as well as the sale price and all costs associated with selling the property. Make sure you keep records for the duration of ownership, and for 5 years after you lodge your tax returns. 

Know what you can claim 

While the costs of buying an investment property can’t be claimed as tax time deductions (such as conveyancing fees and stamp duty costs), the Australian Taxation Office (ATO) does stipulate that investors can claim deductions on certain interest expenses, such as:

• The interest charged against your principal balance on your rental property loan
• Interest against loans for repairs and maintenance for your rental property.

For detailed information on what to do at tax time, we suggest speaking with a qualified tax adviser or accountant and exploring the ATO’s tax time toolkit for investors. 

Borrowing money to invest in property is a big decision, and knowing which one is right for you can depend on your long-term goals and investment strategy. NRMA Home Loans have fixed, variable, principal and interest and interest-only loans available to explore, each with different features so you can determine what may be suitable for your individual needs and circumstances.  

Before you decide, take time to prepare a solid investment plan, know how different loans can achieve different results and understand the financial risks and implications associated with borrowing to invest. 

Financial planning and decision making can often feel overwhelming, but the good news is you don’t have to go through it alone! There are professionals in almost every area ready to help you learn and understand different parts of the process. These experts could include:

• A financial adviser: to help you work out your finances and your investment strategy.
• An accountant or property tax specialist: to help you with understanding your tax obligations and record keeping.
• Real estate agents: to get an understanding of the market.
• Lenders: to get support and answer questions about different home loans.