Frequently Asked Questions

Statistically, in Australia, over 70% of property investors are earning less than $55,000 per annum which is the average wage (ABS).

The vast majority of high net worth individuals have built their wealth through property investment and in fact 65% of those in the Richest 200 list in Australia have become wealthy through investment in property.

Understand two truisms:

1. “It’s not how much you earn that counts but what you do with what you earn”
2. “you don’t have to be wealthy to invest but you do have to invest to be wealthy”.

In simple terms Negative Gearing allows a property investor to borrow money to purchase an income producing property and to claim a tax deduction for the expenses incurred in running that property, including loan interest.

The owner’s “tax rebate” plus the rental income are used to pay off the loan with only a small amount coming from the owner’s own pocket.

It is thus the tax man and the tenants who pay most of the costs of owning the investment property and because the property will have more than doubled in value in time (statistically property doubles every 9 years on average) the investor can either sell for a profit or, more prudently, use it as a means to accumulate multiple properties.

Traditionally, in order for people to buy their first home they had to have a cash deposit up to 20% of the purchase price.
This is not the case with purchasing an investment property.

Cash is not really necessary when you own your own home and have built up equity over the years through paying down some of the loan or, more probably, through the natural growth in value of the home.

Therefore, instead of requiring a cash deposit, financial institutions, such as banks, will allow you to use the “equity” in your home or other investment properties which you own as security (deposit) on the investment property you purchase.

Furthermore, the associated costs of purchasing such as stamp duty, establishment fees, solicitor’s fees and the like can be added to the loan account (mortgage).

Therefore, you do not need thousands of dollars in savings to get started and, in fact, if you have sufficient equity in your family home you may not need any cash at all!

Optimum property investment performance is about minimising your “out of pocket” expenses and maximising your “potential capital growth”.

Some of the factors which may work against this are:

• Purchasing in areas/locations more suitable for “home owners” rather than “tenants”.
• Purchasing “high maintenance” houses.
• Low capital growth potential.
• Paying too much for the property in relation to its location and amenity.
• Negotiating the wrong type of loan and/or structuring it incorrectly.
• Taking out the loan in the wrong name, i.e. not maximising the available tax benefits for the highest income earner.
• Not claiming the highest possible amounts in tax deductions.

These mistakes can easily be avoided with professional help and guidance before you commit to purchasing an investment property.

Holding on to an investment property for at least 7-10 years will ensure a buffer against any cycles in the market.

It is important to keep sight of long-term goals and not be distracted by any short-term hiccups.

Yes and no! There is “good” debt and “bad” debt.

The golden rule of borrowing money is to borrow for appreciating assets such as property, not for consumables that depreciate in value.

Our parents were right in deterring us from borrowing for cars or holidays, etc. which ultimately are worthless. However, debt if used for appreciating assets such as property is a fundamental tool in building wealth.

The herd mentality of the population is such that everyone buys when everyone else is buying and sells when everyone else is selling.

Successful investors are very often anti-cyclical and look on any down-turn in the economy as an excellent time to buy. They then take all the necessary steps to ensure that they are able to hold long-term to reap the rewards of future recovery.

Remember, property investment is about “time in” not “timing”.

Although it is true that with an interest only loan, there is a continuing debt on the property, you retain title to the property at all times and can do with it as you please. Whether you ever get to “own” the property outright is irrelevant.

What is important is your equity in the property and how fast it increases over time. Eventually the debt will be insignificant compared to the property value.
Reducing the principal reduces the interest claimable and you will then pay tax on the rent. So why pay it out?

The only loans which you should pay out while you are building wealth are those that are not tax deductible – such as the loan on your own home or car.

When taking out a loan you have the option of setting it at a lower variable rate of interest or paying a slightly higher interest rate and having it fixed for up to 5 years. This is a calculated decision, based on prevailing economic conditions and interest rate forecasts when you purchase a property.

Either way, with professional advice you are able to “insulate” yourself, to a large extent, by choosing either a fixed or variable interest loan.

Keep in mind that interest paid on investment property is tax deductible, so if variable rates do rise, you are buffered by the tax refund.

We probably expect too much of Accountants.

When you go to fill up your car with petrol, does the mechanic run out to suggest that you should also check your brakes and oil, or have a tune up?

Accountants should be able to answer all of your questions and be specialists in their area of expertise – Accounting.

But don’t expect them to be strategic or creative in guiding your property investment and wealth creation plans.

There are several ways, depending on your employment status. For instance, if you are a PAYE wage or salary earner, you could arrange for your employer to deduct less tax from your pay every pay period (Tax Variation form).

Alternatively, you could simply receive a lump sum rebate at the end of each tax year.

Discuss this with your property investment adviser and your accountant to determine which is better for you.

It is entirely up to you – the great thing about property investment is that you can do as little or as much as you want.

Real estate is only the vehicle for building wealth – a means to an end and not the end itself.

You can do all the maintenance, managing and book work yourself or you can employ someone to do it all for you. The returns from property are such that you can afford to pay to have all those things done for you if you do not have the time, expertise or inclination.

The costs of having it done for you are tax deductible, any way.

Professional property management can do everything from arranging for a water leak to be fixed to making insurance claims, if necessary.

Weigh up the cost in terms of your abilities, family life and peace of mind.

Definitely not. No matter what stage of life you are at, by taking the first step now, setting goals, and planning ahead you will prepare yourself for opportunities in the future.

This is a far better and more profitable position than continuing to do nothing.

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