How does positive gearing work?

October, 2017 by

Are you buying a rental property, but haven’t yet settled on an investment approach? Maybe it might be worth considering a positive cash flow strategy over the more popular ‘negative gearing’ approach.

A positive cashflow strategy (more commonly called positive gearing) is where the rental returns are greater than the outgoings (including interest on the loan, strata levies and insurance). However, positive gearing will only work if a rental home is fully let year in, year out. Also, the main disadvantage with positive gearing is that because you’re receiving extra income, you’ll have to pay more tax.

Negative gearing, in simple terms, is when you borrow money to buy an asset, but that asset fails to generate enough income to cover mortgage expenses and other costs. Any “losses” can then be written off against the income tax you owe at the end of the financial year. However, you must cover the losses yourself. This means you’ll need enough cash flow to tide you over. Plus, running properties at a loss can make wealth creation a slower process.

How to buy a positive geared property?

The easiest way to achieve positive gearing is to buy a property at the lower end of your price range. Then with the help of your Raine & Horne property manager, determine a market rent that covers the interest on your borrowings and other expenses.

To find a positively geared property will involve plenty of research into the suburb or town under consideration. If it is in a city or regional town that your unfamiliar with, check that it has all the essential amenities such as schools, hospitals, shops and leisure facilities that will appeal to tenants. Make sure you consider the health of economy of the area too and the type of tenant that the property will attract to ensure a consistent cashflow.

Before choosing an investment strategy it’s probably best to talk to an accountant about whether you should positively or negatively gear the property.

What can a tenant expect from a property manager?

October, 2017 by

Property managers lease and manage an apartment or house on behalf of landlords. The property manager’s duties include selecting tenants, collecting rent, arranging repairs, negotiating leases and rent reviews and so on.

When a tenant finds a suitable property to rent, they must contact the property manager to arrange a viewing. The property manager will be best placed to answer questions about the property and start the application process.

As part of the application process, the property manager will host an ‘open house’, which is an opportunity for prospective tenants to examine the property. For what it’s worth, it’s best for tenants to treat a meeting with a property manager like a job interview. This means wearing smart casual attire and clean shoes, rather than shorts and thongs.

Property managers may take multiple application for a property. Hence, expats must be sure to submit the correct information to give their application a winning chance. Typical applications require:

  • Proof of identity (passport and drivers license)
  • Proof of income, bank statements for the last three months
  • References from employers, university lecturers, school teachers, a family doctor or solicitor – and especially past property managers or landlords – are essential.

Once your references have been checked by the property manager, your application will be presented to the landlord for approval.

If you win the landlords approval, you’ll be required to pay a bond upfront, which is normally equivalent to a month’s rent. The bond is used as financial protection for the landlord in case a tenant breaks the terms of the lease agreement, damages the property and so on. Your Raine & Horne property manager can explain bond terms to you in more detail.

As the tenant is bound to the bond, be sure to inspect the rental property for damage before moving in. If there is some damage, bring it to the attention of the property manager. If it’s a furnished rental property, an inventory list should be written up. At the end of your lease, the cost of any items lost or damaged will be deducted from the bond.

Finally, ask your property manager about Raine & Horne Assist.  This free service takes the hassle and stress out of moving into a rental property, by offering you all your utility needs such as electricity and gas connections in one place.

How do I enhance my returns on my investment property?

September, 2017 by

It is impossible for individual investors to influence interest rates, employment trends and consumer confidence. However, there are several factors you can control to ensure good capital returns for your property.

Start by paying a fair price for a property that is in a good position and in a suburb or town that has enjoyed long term buyer demand. An investment home should have aesthetic appeal (or the potential for) and unique and positive features such as a desirable view, be close to public transport, have flat, manageable gardens and yards. Floor boards and tiles rather than carpet can also make an investment home more popular with tenants and less costly to maintain.

Consider buying an investment property in an area you are familiar with as it will involve potentially less research time on your part. Start your research by visiting www.rh.com.au. If you prefer a more direct approach, check recent sale prices with a Raine & Horne agent in the area. This will give you an idea of what you can expect to pay for local properties.

While you’re at it, ask the Raine & Horne agent about the suburb or town’s rental yield and vacancy rates. A high vacancy rate may indicate a less desirable area, which could make it harder to find a tenant. That said, the prevailing rate could be quickly influenced by new infrastructure, more jobs and consumer confidence finding their way into the region you’re interested in buying into. This information will be available from your Raine & Horne agent.

Note any proposed changes in the suburb or town that may affect future property prices. Issues such as new developments or zoning changes can affect the future value of a property. Your local council will be able to provide this advice.

To enhance ongoing rental returns, be sure to secure good tenants on long-term leases with the help of a Raine & Horne property manager. Also commit to regular maintenance to ensure small repairs don’t morph into major expenses. For example, it will prove a worthwhile exercise to pay a handyman to regularly oil a sun deck. Avoid this cost and a rotten deck – which will prove a major expense to replace – not only reduces the value of your investment home but also presents a potentially expensive public liability issue.

As such, protecting the value of your rental home also involves having adequate landlord insurance cover, planning for taxes and understanding your eligibility for depreciation allowances. It also means keeping good records to control costs.

How can I increase the sale price of my investment property with a renovation?

September, 2017 by

Thanks to television series such as The Block, revamping a property has become as Australian as kangaroos, meat pies and Scotty Cam. Yet, investors could be burning a massive hole in their bank balances by failing to strategically plan and stage a home renovation.

We’ve all heard the nightmare stories about renovation budgets that have blown out by tens of thousands of dollars in additional building costs, causing financial hardship and stress. However, an investment property renovated in a slap-dash fashion can costs an investor a small fortune when the time comes to sell.

With any renovation or addition, an investor must ensure that it will appeal to future tenants and buyers. Otherwise a poorly considered short-term fix can end up costing a landlord significant money in lost rents or capital gains in the long-term.

As the top value-adding rooms, kitchens and bathrooms are known to sell houses. Pay extra attention to these rooms by replacing flooring or investing in new cupboards for the kitchen, and basins for the bathroom. Moreover, if you own a rental property, you may be able to claim a deduction for the construction costs of alterations, such as adding an internal wall, a kitchen renovation or bathroom makeover, according to the Australian Tax Office. It’s also possible to claim extensions such as a garage or patio, or structural improvements – such as a gazebo, carport, sealed driveway, retaining wall or fence are also tax deductible.

Typically, a kitchen or bathroom renovation prior to a sale will help remove possible buyer concerns that could substantively reduce the property’s sale price. As a rule of thumb, if a kitchen needs, say, $5,000 worth of work, many buyers will take their money elsewhere or seek a substantial discount as much as 10 times this amount. If you agree to the discount, it will take a massive chunk out of your profits.

That said, before renovating your investment property, be sure to talk to your local Raine & Horne agent. Better still invite them to the property so that they can provide bespoke renovation advice with a future, financially successful sale as the goal.

Does a regional property investment stack up?

July, 2017 by

Many investors tend to focus on capital cities when seeking a location for an investment property. However, with a sensible approach and the right research, regional towns can be excellent locations for expanding your property portfolio.

Start by looking for towns with population and jobs growth, and a diversified regional economy supported by more than one or two key industries. These are indicators of a regional property market with potential, because the strength of a town’s local employment prospects will in turn underpin real estate values.

Take Mackay, for example, in Central Queensland. It is a service gateway to primary industries such as sugar cane and ethanol. It also has some Australia’s biggest cattle farms and it’s a servicing hub for several major mines. To find out more about the investment opportunities in Mackay, visit the Raine & Horne Mackay website at www.raineandhorne.com.au/mackay

Also, look for regional cities that are well-served by public transport, hospitals, schools and universities, as this will increase demand for residential properties. The NSW government for example announced in July as part of its South East and Tablelands Regional Plan 2036, $187 million has been allocated for the South East Regional Hospital at Bega and $120 million for the Goulburn Hospital redevelopment. There’s also $50 million for the redevelopment of Bowral Hospital. This infrastructure will help underpin longer-term population growth in these towns.

Across Australia, centres such as Toowoomba in Queensland, Wagga Wagga in NSW, WA’s Mandurah and South Australia’s Port Lincoln are other excellent examples of regional towns offering plenty of potential for long term capital appreciation.

Still, investing in regional towns is not a licence to print money, so it is important you contact a local Raine & Horne agent to help kick-start your research, or visit rh.com.au.

Tips for buying an investment property in a regional town

  • Research is critical for uncovering a successful regional real estate play, which generates decent capital growth and yield.
  • Look for regional towns with viable and growing economies and populations – the Australian Bureau of Statistics or the local council are great sources of data about the demographics of a town.
  • A regional town with excellent long-term growth prospects should have decent infrastructure in place – public transport, major roads, hospitals and schools.

How can I turbo-charge my rental returns?

July, 2017 by

There are many factors investors can control to ensure good capital returns are delivered by a rental property.

From the outset, try to avoid buying at the peak of the market – although without the help of a reliable crystal ball, this is easier said than done.

What you do have more control over is the ability to pay a fair price for a property that is in a good position in a strongly performing suburb or regional town. The property should have some aesthetic appeal (or the potential for), and will have unique and positive features. For example, it might have rear lane access, which is a major winner with owners and tenants in some of our busier inner-city locations. A quality property will also be in good order structurally to keep maintenance and running costs low.

To enhance ongoing rental returns it’s critical that you secure reliable tenants on long-term leases – your Raine & Horne property manager will help here. That said, you still need to keep up with maintenance of the property, having adequate insurance cover and planning for taxes. Your accountant should be able to help you understand your eligibility for depreciation allowances and maintain good bookkeeping records to control costs.

Also, achieving the best investment return possible requires you to raise the rent from time to time. That said, the state and territory governments have guidelines about when, and how rents can be increased that must be followed.

In Australia, if you and your tenant are currently under a valid and on-going Residential Tenancy Agreement, unless stipulated in the lease, you cannot legally issue a rental increase until the terms of the agreement have expired. However, it is usually a good strategy to issue a rental increase to a tenant in the same month that the agreement expires.

As an unwritten rule, the average property rent in Australia increases about 5% per annum ($20 a year for a $400 per week property). However, every suburb is different, and depending on demand, the quality of the property and market conditions, an increase could be above or below 5% per annum.

Why should I have landlord insurance?

July, 2017 by

While most tenants take good care of a rental property, there are always the exceptions to the rule. Moreover, intentional damage is not generally covered by a standard home insurance or body corporate policy.

At the same time, standard home buildings and contents policies don’t usually cover malicious or intentional damage by tenants or the failure to pay rent. This is where ‘landlord insurance’ comes in handy. Landlord insurance is a policy that covers a property owner from financial losses connected with their rental property. It usually covers the following events:

  • Malicious or intentional damage to the property by a tenant or their guests
  • Theft by the tenant or their guests
  • Loss of rent if the tenant defaults on their payments
  • Liability, including for a claim against you by the tenant, and
  • Legal expenses incurred in taking action against a tenant.

It’s important to remember that not all landlord protection policies are the same. Some, for instance, are designed to be taken out in addition to a typical home and contents or strata title policy, while others are more comprehensive. Meanwhile, other policies allow you to take out cover for the contents of the property, which is useful if you rent out a partially or fully furnished property.

If you are renting out a furnished apartment, you might need to check whether a landlord insurance policy will extend to covering damage to furniture, whitegoods and the like. If it doesn’t, it might be worth seeking out separate contents insurance to cover damage to the furniture you have made available to your tenants.

If you own a short-stay rental property, such as a holiday rental, which is professionally managed by a Raine & Horne property manager, you can get a short-stay landlord policy which covers situations unique to holiday properties.

Finally, landlord insurance might be tax deductible, but be sure to check with your accountant before making a claim. To find a suitable landlord insurance policy that matches your circumstances, contact Our Broker on 1800 913 677.

What are some tax tips to maximise my commercial property investment?

With the end of the financial year approaching fast, it’s time for investors and tenants to ensure they are maximising the tax benefits attached to owning or leasing a commercial property.

For owners

Start your tax-time preparation by considering the type of holding structure you’re using to retain the commercial property. This decision will impact the amount of tax you’ll pay this financial year. For example, self-managed super funds can hold commercial properties, which may enable you to pay less tax than if the asset is held as a direct investment. If you’re unsure about the most appropriate tax structure for your commercial investment property, talk with your accountant or a financial planner.

On an ongoing basis, it’s critical that owners have their paperwork in order to avoid the glare of the Australian Tax Office (ATO). This includes keeping copies of tax returns, rental agreements, quantity surveyor reports, loan statements, and receipts for deductions.

Remember that repairs and maintenance expenses for your commercial investment are immediately deductible, while capital improvements to the property are claimed as a depreciation deduction over a longer period of time. If you’re unsure about the difference between a depreciable item and an immediate deduction, seek some clarity from your accountant.

Also, you can’t claim expenses not actually paid by you, such as water or electricity charges paid by your lessees (tenants). Lastly, if a commercial property is fully tenanted, owners can avoid paying GST when buying or selling a commercial property.

For lessees

Rental payments on commercial premises are tax deductible for lessees. Also if you are a lessee, pay careful attention to non-cash incentives related to the property’s fit-out. As a general rule, lease incentives received by a tenant are treated as assessable income by the tax office. If you’re unsure, a quick call to your accountant will prove to be time well spent.

Some tenants may also choose to pre-pay a lease before 30 June. However, this may not deliver an extra deduction, due to the tax structure they have chosen to use.

As the lessee, the ATO advises that you may be able to claim GST credits for the GST included in the rent if you, and the lessor, are registered, or required to be registered, for GST.

The Australian Tax Office website outlines the various tax implications for commercial property tenants and owners.

What is the value of having a depreciation schedule?

May, 2017 by

Before you know it, 30 June will be here. If you haven’t already, organise your depreciation schedule so you don’t miss out on valuable deductions.

Eighty per cent of landlords fail to claim the maximum depreciation deductions available, according to quantity surveying firm BMT Tax Depreciation.

For some, it’s simply because they haven’t yet had a depreciation schedule completed. This is a report done by a quantity surveyor who assesses the building, plant and equipment on the property, and the deductions that can be claimed. To have a depreciation schedule done generally costs between $650 and $700, which is 100% tax deductible.

Other investors fail to make deductions for depreciation because they’re not aware of the benefits. Deductions are available for:

  • Cost of building structure. For properties or structural work completed after 15 September 1987, property investors can claim 2.5% of the cost of the building structure annually for up to 40 years. Additional deductions may be available for some structural renovations, even if they were completed by a previous owner.
  • Plant and equipment. Property investors can claim between 10% and 20% of the value of plant and equipment such as carpets, blinds, hot water systems, air conditioners, cook tops and smoke alarms.

On average, investors can claim between $5,000 and $10,000 in depreciation deductions in the first financial year alone.

The greatest depreciation benefits come from new homes, with up to 60% of the purchase price potentially tax deductible over the life of the property. According to BMT, a brand-new residential property valued at $300,000 could potentially provide a landlord with cumulative depreciation claims for the structural component of $30,000 over a 5-year period.[i] And don’t forget, on top of that the landlord can claim depreciation deductions for plant and equipment within the property. That said, it’s important to note that deductions are calculated on a case-by-case basis and every depreciation assessment is different.

Significant tax allowances won’t always offset some of the costs of purchasing or building a brand-new investment home, and that’s also where a tax depreciation schedule can prove useful.

[i] http://www.bmtqs.com.au/rental-investment-property-depreciation.aspx

What is the difference between a property repair and a capital improvement?

May, 2017 by

The Australian Tax Office (ATO) considers ‘repairs’ to an investment property differently to ‘capital improvements’.

A repair is work completed to mend a defect, damage or deterioration to a rental property – and might involve the replacement of a broken window, a faulty electrical appliance or a new coat of paint. In other words, a repair returns an investment home to its original state and can be claimed as a deduction in the current tax year.

Other costs that can be claimed as an immediate deduction in the income year you incur the expense include: advertising for tenants, bank charges, body corporate fees and charges, cleaning, council rates, electricity and gas, gardening and lawn mowing, in-house audio and video service charges and building insurances. On the flipside, the ATO draws a line at expenses such as acquisition and disposal costs of the property. Also expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants won’t be allowed as deductions.

If the work completed improves the value of the property, it is considered by the ATO to be a capital improvement and the expense is claimed over a number of years via ‘depreciation’ – usually at the rate of 2.5% per year in the 40 years following construction, according to www.ato.gov.au. A capital improvement can be anything from a major renovation to a new gazebo or carport. It also may be as simple as replacing a tired wooden paling perimetre with the latest in brick and wood fencing.

To add to the complexity, when you buy an investment property, there are often items that need repairing before you can lease it to tenants. The ATO calls these expenses, ‘initial repairs’ and they can’t be claimed as deductions or depreciated as improvements. Instead, they are considered part of the costs of buying the property and may be included in the capital gains tax (CGT) cost base. In other words, these expenses can be used to reduce your CGT liability when the time arrives to sell the property.

If you’re unclear about what constitutes a repair or capital improvement, be sure to speak with your accountant before 30 June 2017.

 

[1] http://www.bmtqs.com.au/rental-investment-property-depreciation.aspx

Why do I need landlord insurance for my rental property?

April, 2017 by

Our thoughts go out to everyone in Queensland and NSW affected by Cyclone Debbie and its aftermath. This extreme weather event is the latest reminder of just how vital it is to have adequate landlord insurance in place.

In the event of floods, fires and other natural disasters, landlord insurance covers damage to the structure of your building and for lost rental income until repairs are complete and your property is liveable again. It also covers damage to contents that belong to a landlord, such as carpets, curtains and furnishings. However, it’s worth making sure your tenants are aware that if they want their belongings to be covered, they will need to purchase their own insurance policy.

All insurance policies are not created equal, so it’s essential to read the find print. When it comes to flooding, such as that after Cyclone Debbie, check if your policy has any exclusions. For instance, some policies don’t cover flooding caused by a river bursting its banks, which might be an important consideration depending on where your property’s located. Also keep an eye out for any caps the insurer puts on payouts or conditions that limit payouts, and be aware that you may need to pay an extra charge to cover certain types of damage.

If your rental property is a unit in a strata-title building, check the body corporate’s insurance policy. If you’re worried it falls short, you have the option to buy “strata title protection” from an insurer.

Landlord insurance may also protect you from loss of income when tenants default on their rent and from property damage caused by tenants, but again it’s important to check what’s covered and for how long the insurer will pay out for rental default.

For peace of mind, it’s smart to research a range of insurers and policy options, so you can compare premiums, coverage and claims handling processes. Consider contacting RH Assist on 1800 960 230 or help@rhassist.com.au to discuss your needs and the landlord insurance products they offer

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