Investment properties have many benefits. It is a great way of diversifying
your assets. Property can be less volatile than shares (although not
always) and tend to be where investors rush to when other assets suffer.
Generally, investing in real estate gives you access to two benefits: capital
growth and the tax advantages of sheltering your income.
When buying an investment property ensure you do everything you would do if
you were purchasing a home you would be living in. This includes all the normal
inspections and familiarizing yourself with property prices in the area. The
last thing you want to do is overpay on a property and not see any capital gain.
Because investment properties are bought as investments and not as
owner-occupied residences, purchasers are able to take the emotion out of the
decision of where and what to buy.
As you want to benefit from as much capital growth as possible, the first
rule is to buy in a growth area. Experts define suburbs located up to 10 miles
from a city's central business district as likely to be in a growth area. The
best strategy is to visit a number of areas to get a feel for what they offer.
As you will be renting out the property be aware of what tenants look for when
they rent such as access to transportation, shops and leisure facilities. An
attractive property in a sought-after area will also ensure strong rental
returns and ongoing tenancy.
While owning a house may be nice, apartment units are far easier to rent out.
The
bottom line should be what you can afford to buy and what rent you expect to be
able to charge. Over-committing is not a
sensible move if there aren't any tenants around that can afford to rent it from
you.
Zoning is another factor that can affect what you pay and what you get when
you sell. Homes on land zoned residential are popular as this
protects your investment from developments that might undercut its value.
Look for a property that can be sold quickly if you find you have to sell in
a hurry. Again look for additional features that are attractive to buyers such
as an apartment with a deck or yard, internal laundry, off street parking or
a garage.
If the property you are interested in is currently being rented, ask about
its history of tenants. How long have the tenants been
there? Are they up to date with their payments? How long does it
take to fill a vacant unit there?
There are few differences between what you need to do to borrow for a
property you'll live in and borrowing for one you'll rent out. Some lenders
charge a higher interest rate for investment properties because their risk
is higher, They also require a larger down-payment. The
down-payment can come from a savings account, refinance or an equity
loan from another property you own, some gift money may be allowed or
possibly the seller could hold a second mortgage for the difference of
what you have and what you need so check with your
local bank or mortgage company to see what options you may have. If you are looking at property with less
than four units you can usually get a lower rate and less down payment than
buying five or more units. Five or more units are considered
commercial property.
Capital Gains Tax (CGT) is the tax charged on any capital gains that arise
from the sale or disposal of any asset bought or acquired after 19 September,
1985. You are liable for CGT if your capital gains exceed your capital losses in
any income year. Any capital gain must be shown in your income tax return for
that year. While you do not pay capital gains tax on your place of residence,
investment properties are subject to the tax when sold. Seek advice from a
tax agent or financial planner before leaping to sell a positively-geared
property investment. The temptation is to reap your profits and plough them into
another property – and this is a perfectly reasonable strategy – but don't
lose track of the costs involved in doing that.
The Section 1031 Exchange has become
the tool of choice for property owners who wish to defer taxes when property is
sold. Code Section 1031 allows property to be sold while maximizing profit
and preserving net worth. Although Code Section 1031 is a complicated statute
speak to your tax advisor for detailed information on how it can help you.
