Guide to

Investing in Real Estate

“When it comes to investing, ‘cheap’ is not cheap!”

If you’ve been thinking about buying an investment property, this guide will help you understand the process from beginning to end. It explains what you should be thinking about before you start looking and what to expect once you own a property. Having Mortgage House on your team will help you foresee any potential problems before they happen and combat any issues that might arise later on.

We’ll also help you understand why owning an investment property is a smart way to generate income. Depending upon your personal financial situation, you can benefit by reducing your tax liability, collecting rental income from tenants or watching your property appreciate in value and realising a capital gain.

Mortgage House can guide you through the process from start to finish. We’ll help you put together a trustworthy and knowledgeable team and provide reliable, practical investing advice. Here’s to you and your new venture, making smart, profitable investments in quality real estate!

What You Should be Thinking About Before Starting Your Search

Assemble An Experienced Team Of Professionals

Set Yourself Up For Success

Surround yourself with professional real estate and investment advisers.

Do your homework. Ask people you trust for the names of investment and real estate professionals. Get several references and interview them. Inquire if the person represents another person involved in your transaction. This person could potentially put the interests of a shady developer, for example, ahead of yours. If you are not an expert in the property space, don’t try to be one.

Your solicitor or conveyancer will be one of your most important partners throughout this process. Your solicitor or conveyancer will:

Ensure that the contract to purchase a property accurately reflects the terms to which you agreed.
Anticipate issues or problems well in advance of the settlement date.
Investigate any problems that arise during the due diligence investigation into the title to the property
Determine whether planned renovations might run afoul of zoning or heritage preservation rules or conflict with environmental regulations
Set the date for the settlement and prepare the supporting documents
Ensure that the sale closes properly and that the filing and other transaction fees and taxes are paid in a timely manner
Protect you in the event of fraud or a default by the seller on some or all of the terms.

In short, your solicitor or conveyancer will make sure that every detail is attended to so that there are no problems with the transfer of title.

Become intimately familiar with your cash flow situation

Understand what your current, personal financial position is. You’ll be better able to evaluate how an investment property will affect your financial goals.

Be realistic and honest about your own budget. This will help you understand how much you can borrow and estimate the property’s income and expenses. Meet with your financial adviser or accountant before moving ahead.

Educate yourself on real estate trends and cycles and the risks and benefits of investing

Investment and real estate advisers can help you make property investment decisions that align with your goals. These professionals study the emerging short and long-term trends in financing, construction and job creation. Working with or reading articles written by top property investors will also help you narrow your search options.

For example, assume a company is building an office building in a new suburb.

What information would help you decide if buying adjacent farmland for development might be a good investment?
Or would buying an existing property needing renovation be a better one?
Are most of the workers in management? Are they likely to have young children?
Is there a nearby school that has a quality reputation? If not, perhaps the parents would not choose to live near the office and instead, would drive in from another close city or suburb.
If you built a small apartment building near the office building, would the lack of a grocery store deter people from renting there?

A skilled property adviser would help you answer these questions. He or she can help you understand the history of the property you are looking at.

You’ll want to know whether there have been any local environmental disasters. Is the water safe to drink? Are there any existing or pending legislative proposals that might limit what kind of property you can develop or renovate?

OK, you get the idea. With any property, there are a lot of factors to consider when making assumptions about whether anyone would rent it. It may look like a brilliant idea to put up an apartment complex near a new office building. But, it may in fact be a losing move.

You may want to build the most plush, executive apartments. If there is no access to retail stores, medical clinics and hospitals and schools, no one will want to live there. Educate yourself about trends and cycles and meet with experts who know your market.

Retail Stores

Medical Clinics

Hospitals

Schools

Keep your emotions out of business and investment decisions

Buying with your heart instead of your head is one of the biggest and most common mistakes that first-time investors make. You could not only lose—you could lose big.

Often, investors conveniently fail to recognise the impractical and negative financial factors associated with a property they’ve fallen in love with. They ignore the nagging truth that they should indeed be running in the other direction:

Avoid being nostalgic about “the old neighbourhood.” Yes, perhaps you have great memories of running around and playing outside until sunset with your childhood friends. But now, your former park is a parking lot or a hang out for seedy characters. Unless you are planning on investing in full-scale urban renewal, you’re probably better off to not buy a rental property in the area.
Don’t invest based on “curbside appeal” alone. You might be in love with the “period characteristics” of the front porch or the seaside view. If the place is ready to collapse because it’s full of termites or the beams are rotting, it won’t be so cute when it’s fallen into a pile of sawdust or sticks. Inspect, then respect the findings. Walk away if indicated.
The “I have a hunch” theory is another bad way to buy a property. It’s true, some people are more intuitive and they can be right once in awhile. But, chances are, these people know more than they are letting on. Maybe they did some research or got a hot tip from a reliable source.
Trust the experts if your intuition has a history of not being reliable. It’s not likely to change now.

Don’t buy into the hype

In real estate investment, there are many factors that need to be taken into consideration and everyone seems to have an opinion. These, often unqualified, opinions include the current state of the market, how the economy and politics may impact rental returns, what the interest rate is likely to do next quarter etc. Some pundits may even try to tell you that you may be too young or too old to start investing in real estate.

The key here is to keep your eyes and ears open but to take any opinion or advice with a grain of salt. Your sole focus should be to maximise your household income and real estate can be an excellent investment vehicle for achieving this.

For most of us, if we really could rely on our hunches, we would already be at the casino by now, right? Buying property in this frame of mind is no better than throwing money down on a game of roulette. Invest based on good research, solid advice from knowledgeable people and a level of risk you can live with.

Next, You Need To Understand The Pros And Cons Of Property Investment

While many Australians understand why they want to invest in real estate, few really understand why it is a good or bad investment. Here are some things to consider about the real estate market.

Pros

Real estate markets can be more stable than equity markets during certain economic cycles
The right property can produce rental income right away
Expenses associated with your property can be used to offset the rental income you earn, resulting in a tax reduction
You have an investment that you can see and inspect on a regular basis

Cons

There is a risk that the rent you collect may not cover all of your expenses
Interest rates may go up and increase the monthly payment you owe to your lender
Vacancy rates can vary for many reasons—but if you fail to find a tenant, you will lose income
Property values can go down and rob you of any capital gains you may have accrued in the past

Investment Seminars

A popular way of learning more about property investment is attending various seminars, both free and paid.

One of the dangers of attending such seminars is that it is often hard to spot the ones that offer genuine value and those that just turn out to be a scam. More often than not, such seminars act as a prolonged sales pitch for some paid course or dubious investment proposition.

If you’re thinking of attending a seminar, get in touch with the team at Mortgage House beforehand to ensure you don’t end up wasting your time, or worse, your money.

What is Your Timeline?

While you might be anxious to jump right into the property market, planning out a timeline for your search process can help you make a better decision.

Your professional team of advisers can steer you away from the “flipping” mentality if that isn’t part of your plan. “House flipping” is when investors buy homes at auction, make some quick improvements and then, resell the house for a profit in a short period of time.

You’ll also avoid making decisions solely based on fluctuating interest rates and short-term bubbles. Setting a smart and practical timeline for making your first investment is an important step. Generally, you should give yourself 6-12 months to find a property that fits with your goals.

How Do You Feel About Risk?

Every person is different when it comes to the amount of risk he or she feels comfortable with.

That’s why, if you visit any casino, you’ll see some people only playing token slot machines and pokies while others are throwing down hundreds on a roll of the dice at the craps tables. And often, it’s not a matter of income, but a matter of comfort with the risk— the very real possibility of losing it all.

After all, at a casino, the odds are already stacked against you. Most casino games are simple games of chance with the “odds” stacked in favour of the “house.” So, regardless of your skill level, you are still more likely to lose than win.

Real estate is generally a better, smarter investment. You have much greater control over the variables that affect its value. You can influence your odds of “winning” in the real estate market by learning as much as you can about it up front.

How Diversified is Your Entire Portfolio?

A diversified portfolio is a safe way to manage your overall risk. Property investments can be a smart addition to your wealth-building portfolio. Diversification of your portfolio is one way to spread your risk.

The idea is that, if one asset that you own does not do well for some reason, then the other assets in your portfolio will earn enough to cover the loss. Hopefully, a well-managed mix of assets will yield a net-positive cash flow or appreciate enough over time to more-than-compensate for those that don’t perform as you’d expected.

Again, you can be a savvy investor who makes informed and well-timed decisions and still be caught off-guard by an event in a foreign currency market or a natural disaster that could wipe out your property investment.

The unpredictable is always possible. Diversification minimises the effect of one bad apple spoiling your entire basket of life-savings.

Do You Want To Be An Active, On-Site Property Manager?

It is inevitable that something will go wrong, even with a newly constructed property.

Whether the problem is a rotting beam, crumbling cement or a toddler flushing a diaper down the toilet, you will still be the first person the tenant calls for help. Ask yourself a few questions like:

How much time and money are you willing to put into your investment?
Do you need an on-site manager to help you maintain your property?
Are you willing to get up in the middle of the night when the plumbing leaks or will you call a plumber?

Do it yourself

Call someone else to do it

Get a property manager

Compromise with tenant

If you are handy, you might be willing to do the work to fix or improve your property. But if you’re not, coming up with a good estimate of what the cost would be to pay someone else to do it is extremely important to know before buying a property.

A good compromise would be to require the tenant of a rental property to pay for any such repairs. While used often in commercial and retail leases, a residential tenant may consider paying for repairs and maintenance in exchange for a rent-rate adjustment. Of course the other option is to hire a professional property manager.

Hiring A Professional Property Manager

If you prefer to have a more passive relationship with your investment property, congratulate yourself on recognising your limits. Many investors buy a property with the grand illusion that they are way more handy and skilled than they actually are.

The main reason they decide to perform the work themselves, and usually poorly, is to save money. That’s a warning sign right there. When evaluating whether to be the maintenance engineer on your property, you should still evaluate and estimate the expense of having a professional do the work anyway. That way, you’ll have a basis of comparison when deciding if it’s worth doing yourself or paying someone.

This exercise makes you sit down and think about each contingency and the time and expense involved to resolve it. Only then can you make a good decision about whether or not you can perform the work yourself from a time and expense perspective. A professional property manager will relieve you of many potential headaches that come with owning an investment property. Also, it can be difficult to remain emotionally detached when a tenant or mother nature damages your investment. A property manager can take appropriate action to remedy the damage quickly and efficiently

Professional managers also have an extensive network of reputable tradesmen to perform quality work at fair prices. Their broad knowledge of current industry practices will help you keep abreast of trends, legal requirements and possible future investment opportunities.

Setting Your Investment Goals For Your Property

Generally, investments in many kinds of assets, including stocks and real estate, produce a benefit to you over time.

If you have an active investment strategy, it means that you would like to own an asset that produces income on a periodic, regular basis. Receiving quarterly stock dividends is one example. Another is the monthly rent income you receive from tenants after paying expenses.

A passive investment would be something that does not necessarily produce regular payouts of cash, such as rent payments. Instead, passive investments just sit there and improve with age—like a vintage wine. And after a set period of time, you decide to sell it for more than you paid for it months or years back. Many passive investments produce tax benefits that your tax professional will discuss with you in detail.

When You Are Ready To Start Searching For Your Property

Snoop Around And See What’s Going On In The Area

Do your research to determine which areas of the city, suburb or countryside contain investment properties that fit your goals.

An up-and-coming part of the city might have numerous old buildings, ripe for rehabilitation and renovation.

Mortgage House can assist by offering you FREE property reports. You’ll be able to talk to someone here who has your best interest in mind and can help you objectively value a potential investment property.

If you are willing to put in a lot of time and renovation cash up-front, you could likely reap huge rewards several years later. Hopefully, by then, the entire area will have been rehabilitated and vacancy rates (for what will become an in-demand area) will become very low.

Here are a few more things to evaluate:

Use the checklist below for each area you are evaluating, then compare.

Crime rates and number of calls to police.
Demographic information such as median income and educational level of current area residents.
How much maintenance will be required each year due to neighbourhood problems?
Are other investors buying up property?
Are grocery stores, day care centres, small businesses and restaurants building or leasing space?
Consider the number of schools nearby, the availability of public transportation, industrial plants, parks and green spaces, office buildings and retail storefronts.
Are there petrol stations nearby?
What is the city infrastructure like there—condition of the roads, age of the sewer systems and potential water contamination?
Are young people moving into the area?
Do the local, state or territorial governments offer some kind of tax incentive if you invest there? How would that offset any additional expenses associated with a renovation? Would it be enough to justify the risk for you?
What is being built in the surrounding area?
Is the property in a city, suburb or rural area?
What is the “prime” or most desirable location within each of these areas?
Visit the local shops and restaurants in person.

What Competition Do You Have?

After visiting the neighbourhood and getting a feel for it, it’s time to snoop around and see what your competition is up to.

You’ll want to know what kind of rental return they are getting and how much money they are investing. Who else is looking for investment properties and how much will they spend on them?

Research potential rental earnings and ask for a professional rent appraisal, don’t just rely on the listing agent’s information. Chances are, the income is inflated and the expenses are minimised. How many other investors are already competing with you for rental income?

Research current vacancy rates and rental listings:

What percentage of residents are renters?
What is the target vacancy rate in order to make sure your property will be positively-geared?
What is the average rent rate in the area?

Understand Your Financial Position Before Looking For A Property

If you’ve not budgeted properly in your existing business or personal life, you should recalculate your budget before investing in a new property. Research potential rental earnings and ask for a professional rent appraisal, don’t just rely on the listing.

Calculate your income from all sources
Determine your expenses and plan for emergency cash outlays
Meet with an experienced mortgage lender who can help you determine how much you can afford to borrow for investment

You don’t want to end up in a “snowball” type of situation in which you have a personal emergency and have to borrow funds from your investment account to pay for, say, a leaking roof. What happens if the same storm rips the roof off of your rental apartment building?

Should You Save As Much As Possible For Your Down-Payment?

While putting a larger down payment on your private home is generally a good decision, it can also be smart when you purchase an investment property—but not always.

Your accountant can help you consider the time-value of money and the tax issues associated with doing so. This is a very individualised decision, the answer to which will vary greatly according to your financial situation. Is a bigger down payment better?

You may:

Pay less total interest over time
Get a mortgage at a lower interest rate
Have smaller monthly payments
Have a larger number of lenders willing to work with you

Positive Or Negative Gearing

Many investors, especially first time investors, need to borrow money in order to buy a property. This is known as “gearing.”

Gearing can be either positive or negative, depending upon the cash flow the property produces. In some situations, usually for a strategically designed tax purpose, negative gearing is preferred.

Negative Gearing

The result of the income from investment being less than expenses. For example, the rent you might receive from someone renting a home might not be enough to cover the expense of your managing and maintaining the property.

Investors will either liquidate or sell the money-losing property or hold onto to it with hopes that they will make up the shortfall when they eventually sell the property. A tax professional can advise if this is the right strategy for you.

Positive Gearing

When your earned income from an investment is higher than expenses and loan interest payments. Generally, this is the ideal situation because your property pays for itself. With the guidance of your tax professional, you should determine the effect of this positive cash flow on your financial position. Perhaps you will consider using it to improve your property or make amortisable repairs.

Both negative and positive gearing strategies can have unique tax benefits or repercussions. You should plan to meet with your accountant or tax adviser once you’ve decided upon an investment property. Coordinate and work with your lending specialist or mortgage banker to structure loan terms that work with your wealthbuilding goals.

Who Is Your Target Market?

You might want to consider the type of person you see as the ideal tenant for your property. Many owners have a preference for one reason or another or perhaps the location of the property is in demand with a certain group.

However, if you do not wish to rent to young singles because you believe they are not responsible enough, then you might want to avoid buying a rental property in a hip, up-and-coming neighbourhood.

If you think you’ll have better luck with young families, then a suburban location might be a good place to start your search for an investment property. Just keep in mind that there are laws that prohibit discrimination against applicants based upon certain characteristics.

Legal Requirements: You cannot refuse to rent to someone solely based on race, religion, gender, age, marital status, sexuality, having children, pregnancy, mental illness or having certain disabilities. Check with your legal adviser on the effects and limits of the law as they might apply to you.

It’s Good Business: Also, remember that it is good business practice to fully review all rental applications and not base decisions on appearances or phone conversations only. What is important is whether the applicant has the income to make the payments, has a clear criminal record and meets your other eligibility criteria.

What Is On Your Target Market’s Wish List?

Everyone is different. What matters most to a growing family, might not be what matters most to a professional couple whose children are grown and out of the house. After you determine who your ideal tenants might be, the best way to attract them is to offer what they want in a rental apartment. Your investment adviser can help you research what is in demand in the market by demographic characteristics like age, marital status or educational level.

Here are a few things to think about when looking at investment properties in various locations while keeping your ideal tenant in mind.

What is the travel time during peak and non-peak driving times to potential employment and entertainment centres, medical care and schools?
Is there public transportation available and is it safe?
How close are retail and grocery stores?
Is the property fairly private with private outdoor space or is it located in a densely populated area near a large amount of multiple-family housing?
Is the crime rate and level of security comparable to other in-demand neighbourhoods?
Are there any airports nearby or flight paths overhead that might be a noise problem?
What is the traffic like in the area?

When Is The Right Time To Call In An Independent Agent?

Just like the relationships you have built up with your other professional advisers, it will take time to select the right one and feel comfortable.

So, it’s smart to start looking right away for an agent who shares your passion and interests. When it comes to choosing a property, most people prefer to work with someone who thinks along the same lines they do. But people also want their independent agent to be honest about the pros and cons of each property.

Ultimately, it’s up to you whether to make an offer while relying on a trusted agent to show you a curated selection of properties based on your specific criteria. Your relationship with your agent needs to be based on respect and trust. Choose an agent with whom you can have honest discussions about your finances and goals.

Who Do You Trust

Choosing a family member or close friend has its pluses. But if you aren’t comfortable disclosing very personal details about your financial situation or your investment goals, then think about working with someone you do not have a personal friendship with or who is outside the family. Also, think about what would happen if a family member or friend did not perform as you had hoped. Are you willing to compromise that relationship?

Your Mortgage House Independent Adviser

Working with a knowledgeable agent will help you secure the right property quicker and put you on the path to investing success. Mortgage House has a team of trained independent lending advisers and property valuation specialists. This combination of skills and expertise under one roof ensures that you have all bases covered when it comes to finding and then appraising investment options. In addition to objective advice, you receive free property reports that will help you to assess, for instance, the longevity of a property.

Property Risk Analysis

Properly evaluating a real estate investment opportunity involves being clear on the risk factors it presents.
Mortgage House’s free report gives you an understanding of both property risk ratings and market risk ratings, including:

Risk associated with location / land and environmental issues
Potential issues associated with building on site
Market volatility
Impact of local economic factors
Market segment conditions.

In order to obtain this free report, get in touch with an independent lending specialist today on 133 144 and mention this guide.

When Is The Right Time To Meet With A Mortgage Lender?

As soon as you know that you’d like to get into the investment property market, you should sit down with a lending specialist. In fact, it’s a good idea to set up a meeting even before you start looking at properties.

A lending specialist will help you understand what you can and cannot afford based upon your own personal financial situation. Then he or she will help you estimate the amount you can borrow in order to finance your investment property and even get a pre-approval. This way, you’ll be ready to make an offer as soon as you find the right property.

Obtain Pre-Approval

Since most sellers won’t even consider offers from buyers without pre-approval letters, you’ll most likely want to start the process as soon as possible. Your loan officer or lending specialist can guide you through the prequalification process and gather the documents you’ll need to submit and the different loan programs and options available to you.

Determine What You Can Afford

What Is Your Estimated Gross Income From The Property?

A lending specialist can help you determine what your income is for investment purposes. Your accountant and financial adviser can help you determine your income for taxation purposes.

However, if you are purchasing a rental-income producing property, you might be able to take the future income into consideration for mortgage lending purposes.

Generally, your lending specialist would require proof of signed lease agreements that produce an acceptable amount of cash that can be applied to the monthly mortgage payment.

Additionally, the lender can consider how much your investment will offset or reduce any tax liability you might have. A reduced tax obligation resulting from a strategically-planned investment can positively affect your financial position.

What Are Your Estimated Total Expenses Associated With Operating An Investment Property?

Estimating expenses for an investment property is one of the most difficult parts of your financial planning and due diligence processes.

Of course, if the property is currently an investment property, the current owner can provide records of regular monthly expenses and planned maintenance and improvement costs. Use this information as a starting point and review it with a sceptical eye. It may be that the seller of the property is lowballing the expenses to show a greater net cash flow from the property.

Make sure that you engage your own financial professionals to help you accurately estimate your expenses. Consider that you will have ongoing expenses each month, upfront purchase costs and you’ll need to make a deposit into a savings account to cover unexpected expenses.

1. Ongoing monthly or annual expenses

Building and landlord insurance will protect you against unfortunate catastrophes like fires and floods. Insurance also can protect you against typical problems that tenants can cause: refusing to pay rent, causing damage and abandoning the lease obligation.
You may be needed to pay an annual service fee to your mortgage or loan provider. You’ll want to ask this question when searching for a loan.
If you own property in a shared community such as a townhouse, unit or flat, you are responsible for paying monthly or quarterly dues or fees that cover common area maintenance and other expenses. You’ll want to investigate the integrity of the association, the body corporate that manages these body corporate fees. Consider paying these up front, from the beginning, if the membership is optional. It can save you substantial sums of money down the road when major maintenance to the property is needed. A body corporate will also ensure that insurances are up to date, the property is safe and well-maintained on a day-to-day basis.
Your rental income may or may not cover your monthly mortgage or loan payments. If you cannot make your full loan payment out of your rental income, you will have to make up the shortfall out of your personal funds. You may also be subject to a rate hike from your lender.
Utility fees are generally paid on a monthly basis. Unless the utility services on your property are metered separately, you will be responsible for making the payment despite the tenant’s contractual agreement to pay
If you choose to hire a property manager, rather than manage the property yourself, you’ll need to factor this into your total monthly expenses. Property management fees vary greatly by state and region. Contact several management companies to obtain bids for services and find out what is and is not included.
Carefully calculate the repair and maintenance expenses to keep your property safe and up to legal standards. Add this set amount each month to the savings account you set up to cover emergency expenses.
Your accountant will determine the amount of your depreciation expense.

2. One time settlement fees

Conveyancing and solicitor fees can run into the thousands of dollars.
Transfer duty is a tax you must pay on the transfer of property. The amount of the tax varies greatly by state and by the type of property being purchased.
Fees to obtain a building inspection before signing off on the documents. You’ll receive a written report on the condition of the property, including any defects and code violations that exist.
Fees to your lending institution or bank.
Mortgage application fees cover the preparation of the loan application and supporting documents, property valuations and title searches.
Lenders mortgage insurance (LMI) protects the lender in the event that the borrower defaults on the mortgage loan. The fees are based on the amount of the loan and average 3-4% of the total.

As a general rule, these one-off fees that arise when you purchase a property can be as high as 10% of the purchase price. While this may seem steep, it is best to reserve this amount ahead of time, just in case. Some lenders will allow you to “roll” these costs into the monthly mortgage payment amount.

You Will Incur Tax Obligations When Buying And Operating Your Property

You likely will have to pay income taxes on the income you receive from your property. You may be able to reduce your tax liability by the costs of operating and maintaining the property and the interest expense paid on your mortgage.
States and territories levy land taxes on the value of unimproved land, which does not include the value of buildings or improvements. Your primary residence is exempt from this tax.
Local property taxes, also known as council rates, vary among states and fund investment in local communities and the services they provide such as rubbish collection or parks-and-facilities maintenance. The amount and the frequency of the tax varies by community and the property value.
When you sell your property, the profit you make may be subject to capital gains tax. If you sell your property before holding it for 12 months, the capital gains tax rate is usually the same as the income tax rate you pay. If you hold the property longer than 12 months, the tax rate on the capital gain can be reduced.
You may be responsible for paying a Goods and Services Tax (GST) upon the sale of your property or receipt of rental income. The GST is similar to the VAT levied in European Union countries. You should discuss it with your accountant before signing any contracts to buy or sell property.

You May Be Entitled To Tax Deductions For Owning Investment Property

Certain expenditures qualify as “offsets” against the income you earn from the property. This means that you can lower your tax liability. These include:

Maintenance costs and expenses

Advertising expenses to find tenants
Bank fees related to your mortgage loans
Some taxes paid to local governments
Cleaning, repairs, maintenance
Insurance, water, electricity and gas not paid by the tenant
Surveyor and property management fees

Depreciation allowances

Depreciation on the building
Durable goods like appliances
Furnishings, window coverings and carpets
Hot water or heating systems

Negative gearing

You may be able to deduct the net loss on your property from your gross income
Consult with your tax adviser before filing your return

Deduction Assessment provided by BMT Tax Depreciation Quantity Surveyors

Average new Sydney apartment
For illustrative purposes only
Purchase price Year 1 depreciation Year 1-5 cumulative
depreciation Total depreciation
(40 years)
$810,000 $10,300 – $13,800 $37,800 – $50,800 $460,000
Average new Queensland house
For illustrative purposes only
Purchase price Year 1 depreciation Year 1-5 cumulative
depreciation Total depreciation
(40 years)
$632,000 $11,000 $14,600 $329,000

The depreciation deductions in this estimate were provided by BMT Tax Depreciation. They are calculated using the diminishing value method of depreciation.

Income Tax Withholding Variation

In addition to the tax benefits provided by negative gearing and various non-cash deductions, there is an additional benefit that is available to employed real estate investors. Previously known as the ‘section 221YD variation’, an Income Tax Withholding Variation (ITVW) can help those paying PAYG to further maximise the benefits of their investment.

While things such as depreciation and negative gearing help you reduce your tax, an ITVW helps you access this money without having to wait until the end of the financial year to do so. An ITVW allows you to take home more of your salary and re-invest that money into your property.

To put an ITVW into place, you need to contact the Australian Taxation Office in order to apply for a PAYG tax variation. Once the variation is processed, your employer will be notified of the new, reduced amount of tax to be taken out of your salary payments.

The ITVW is a great tool that can help you better manage your cash flow situation as an investor.

Contingency Planning

Whether your property is occupied or not, you will still have to make sure it is properly maintained. No matter how attentive you are to these details, one disaster can destroy everything. It goes without saying that having insurance for these catastrophic events is necessary. In fact, most lenders will insist that you obtain insurance as a prerequisite to giving you a loan to buy the property. Then, the lender will require you to produce proof of insurance annually.

Insurance Terms

When you meet with your insurance agent, you will need to discuss in detail the deductible amount you can afford before your insurance will kick in to pay for repairs or reconstruction. You’ll also want to check the types of natural disasters that may or may not be covered and the details of each level of coverage.

Coverage varies by cost, deductibles, location, underwriters and companies. You should ask your insurance agent what is included in your policy and what isn’t when obtaining estimates and bids for coverage.

Make sure that you ask about coverage for the following types of problems:

Burst water pipes and plumbing back-ups
Major roof leaks
Tree roots growing into the sewage pipes
Gas leaks
Flooding and flood damage to exterior surfaces, interior surfaces and furnishings
Fire and storm damage
Other damage that may make the property unsafe or uninhabitable.

Renovations

Buying an investment property that may need up-front renovation work can be a smart move. The market value will most likely increase immediately and you might be able to collect higher rents. However, the key to getting a positive return on your renovation investment is to be informed and educated about where to put your money.

Cosmetic improvements inside and out

Take a look at your responses to the previous section on “What is on your target market’s wish list?” Those are the improvements that will attract the tenants you want and command higher rents in the market.

Don’t do more than you have to when it comes to cosmetic improvements. Yes, designer bath fixtures that cost five times as much as what is “good enough,” will look great. But, will fixtures that eat into your cash flow, allow you to increase the rent? Probably not. Oak cabinets over cherry? Probably not. Do “enough” to get the job done.

How Do You Decide What To Do

Enlist the help of financial experts regarding whether your property can support the kind of renovation investment you are proposing.

Here are the top drawcards your potential tenants are searching for:

Kitchens and bathrooms. Even a fresh coat of paint and better lighting can make a huge difference. It does not cost significantly more to go even a bit further—change out the cabinet handles or install a new countertop in the bathroom or on a kitchen island.
Exterior appearance or “curbside appeal.” Get rid of overgrown hedges and gardens. Paint the siding and trim, and make the walkway to the property safe and welcoming. Make sure gutters function to prevent damage from water. Consider adding attractive flowerbeds for a finishing touch. Potential tenants will stop and look, not simply drive on to the next rental house on the list.
Update floors and window treatments. One of the biggest turnoffs is ugly, faded and damaged linoleum, carpeting or windows. The flooring is one of the first things a potential tenant sees when viewing your property. Changing things up to create a dynamite first impression is just smart.

Kitchens

Change the handles or install a new countertop

Bathrooms

Consider a fresh coat of paint and better lighting

Curbside Appeal

Trim the hedges & consider adding flower beds

Floors

Flooring is the first thing people see

Structural improvements and renovations

Almost every investment property will require some level of improvement. That does not mean that you, as the investor, have to do it. Certain problems, especially structural problems should send up red flags. Of course you’ll want to do the calculations to see if structural improvements are financially prudent and align with your investment goals. And, if they don’t, run the other way.

There will always be another property to invest in that will be in better shape. Let this one go and keep searching. Generally, you should avoid buildings with major structural problems unless you have the construction skills to do quality work yourself. You also want to ensure that the work you do meets all regulatory standards.

Buy Within Your Budget and Goals

Don’t buy a property that doesn’t fit your budget and goals. Otherwise, you might be tempted to “cover up” structural problems with cosmetic fixes. This will just lead to problems down the road and could put you or your tenants in harm’s way.

If you do take on major renovations, but can’t do the work yourself, consider hiring a project manager or general contractor who can help you estimate costs, avoid mistakes and keep things running on schedule.
Get at least three quotes or estimates for every project, even the cosmetic ones.
Watch that contractors use the materials actually quoted in the bid, complete each stage of the work on time, don’t cut corners or use cheap fittings.

While you’ll want to discuss the tax effects of any kind of renovation with your financial advisers, Mortgage House can help you work through the profitability of doing so successfully.

The Offset Account With Unlimited Free Transactions

Gathering the Documents Needed To Apply For a Loan

Having your documents in order will simplify the loan application process and help your Mortgage House lending specialist review your application and coordinate the closing (settlement process) with your solicitor or conveyancer.

Provide the following information for yourself and any co-borrower

Identification documents with photos.
Full employment history for at least five years.
Current salary records.
A letter from your current employer verifying the terms of your employment such as your earnings, your position and your length of employment to-date.
A copy of your most recent tax return or assessment notice.
If you are self-employed, provide copies of your tax returns for the last three years.
Your current and previous addresses for at least five years.
List your current assets; provide a brief description and the estimated value of each one individually. Your assets include such things as your cars, motorbikes, boats and antiques and collectibles.
List your current liabilities; provide a brief description of each debt, the amount owed, the credit limit and date you plan to eliminate or retire this debt. Your liabilities include any mortgages or equity lines you have on your own home and other real estate, credit card debt, money owed to family members or friends.
If you plan to request a reduction in your credit limit from your credit card company, do so at least two weeks in advance to ensure that you have the letter when you need to apply for financing. Reducing your credit limit voluntarily may allow you to qualify to borrow more to finance your investment property purchase.
Gross (before tax) and net income and outgoing expenses.

Which Type of Financing Should You Use?

The kind of property you buy ultimately depends upon the type of financing you can obtain and how much you can borrow. Mortgage House, a leading non-bank lender can help you determine the best way to finance your investment property.

Your financing options will depend upon several factors, including the amount you have saved for your deposit. Mortgage House offers these popular financing options:

Fixed rate loans with 100% Offset
Variable rate loans
Option to split the loan amount between a variable and fixed interest rate
Offset accounts to minimise your interest expense

If you have one loan that covers more than one property:

Application and legal fees are lower because you are applying for only one loan that is secured by two or more properties
It is easier to manage one payment
Capitalisation of interest may affect your tax planning

If you have more than one loan for your property or properties:

It may be possible to claim additional tax benefits by capitalising interest
You can select different options for each mortgage potentially getting a lower interest rate
You can have different funders for each home or investment loan
Loan application and legal fees may be higher than for one loan application
Visa credit card at home-loan rates

Consider these options when you evaluate the financing options for your investment property

Interest Only: Interest only loans allow you to free up some of your cash flow. You may not have your property leased when your loan settles. Or, in the future you may have a gap in rental income in between tenants. You will still need to make your loan payments even without rental income. Having an interest only home loan can minimise this burden. You pay only the interest portion of your loan each month while the principal remains at the full balance. Interest only period loans are available for various terms, even up to 10 years and may be extended upon application. After a set time period, your loan will revert to a standard principal and interest arrangement.
Extra Repayments/Redraw Facility: You may want to make extra loan payments to create a “kitty” for times when you have unexpected expenses such as plumbing/electrical repairs or a lack of rental income. You may even skip a mortgage repayment as long as you have enough funds in your “kitty” to cover it.
Offset Account: You deposit the weekly rental or other income into an account that offsets the interest you are paying on your loan, saving you money.
Split Home Loan: A split loan allows you to combine your home and investment loans under one “umbrella facility.” You can separate the non-deductible debt portion of your home loan from the deductible portion and receive separate loan statements for each split.
Equity Home Loan/Line of Credit: You are able to get an interest-only line of credit on your home or investment property. You can borrow up to a specified limit and access the funds when needed for short-term cash flow issues in the future.

Make An Offer

Once you’ve decided upon a property that works with your investment strategy, you’ll want to make an offer to buy. Your real estate agent, solicitor or conveyancer will help you draw up the proper paperwork to make a formal offer. And, depending upon the negotiations that have already taken place, your offer might reflect an already-agreed upon sales price.

Negotiate The Price

If not, then you should anticipate that you and the seller might go back and forth a few times to negotiate the final price. Once this happens, or during the process, you’ll want your solicitor to review the contract before signing off on the final version.

Cooling-off Period

Your solicitor should advise you on the “cooling off” period—the period of time you have to change your mind and withdraw from the contract. This allowed cooling off time varies from state to state.

Settlement Date

Your contract should set a closing or settlement date that allows enough time to finalise your loan documents, check titles, order any pest and building inspections and put other details in order.

Auction Property

If you buy a property at auction, the offer process is different. You may be able to make an offer on an auction property before the actual auction date. If you purchase an auction property at auction, you will be contractually bound to complete the sale after making a 10% deposit on the property.

There is no cooling off period, like there is in a regular real estate transaction. Therefore, you’ll want to ensure that your solicitor reviews all of the documents and that you organise pest and building inspections well ahead of the auction date.

You Got It. Now What?

Chances are that you’ve already obtained a pre-approval letter from your lending specialist. Now that you’ve entered into a contract to purchase a specific property, you should contact the lender to prepare and organise the loan documents for a final loan approval.

Prior to the settlement date, you’ll also want to perform a final inspection of the property. If your property is interstate, arrange for an inspection with a colleague or professional inspector. (The associated cost may be tax deductible). Coordinate with your real estate agent and check to see that all inclusions in the contract for sale are in working order.

Final Inspection (Before Settlement) Checklist

You’ll want to check these items, at minimum:

Light switches
Power points or outlets
Air conditioners
Exhaust fans
Hot water heating elements and tanks
Swimming pool and equipment
Security system

Settlement And Transfer Of Title

Your solicitor or conveyancer will set up and coordinate the settlement process. At this time the seller of the property is paid and the title is transferred to you.

All lender’s mortgage insurance and other insurances, taxes and transaction fees will be paid. You’ll now be able to collect the keys to your new property from the real estate agent.

Get It Rented!

If you’ve hired a property manager, he or she will locate quality tenants, collect rent, conduct inspections and organise necessary repairs and maintenance.

6 Months Later

Now that you have been a successful investor for a few months, it’s time to evaluate your financial position.

Are you meeting your goals? You’ll want to know if you are meeting your investment goals.
If not, is there anything you need to change so you can meet them and “add value” to your property?
What has changed in the investment environment since you bought your property?

You already know that the real estate market is always changing. It can be affected by any number of factors both within and outside your control. That’s why it’s important to constantly review your investment’s performance on an individual level and within your overall wealth-building portfolio.

Consider what happens when vacancy rates are high, i.e., that the rental market is flooded at the moment. That means you have a lot of competition, there are a lot of other available units out there. Some investors might sit and whine about the developer that just dumped 300 brand new apartments on the market and is offering huge discounts for signing a new lease.

Don’t complain—Adjust.

Rather than join the complainers club, you’ll set out to investigate your competition and figure out how to place your property on a competitive footing. When you did your research earlier to determine what your ideal tenants had on their wish lists, you learned what is important. Update that and see what is on it. Then look at your own property to see if it is up to par.

Are you maintaining your property properly?

If not, then think about what you’ll need to do and how much it will cost to make repairs and renovations. Keep in mind that, failing to maintain your property might be short-sighted and cost you more in the long term. If you haven’t joined your body corporate yet, reconsider now. It can save you thousand’s down the road, especially when the unexpected happens.

The decision to maintain your property’s infrastructure is a different decision than whether to replace a datedbut-functioning bathroom countertop. Renovations are mostly planned and optional. Maintenance is not.

Are you losing income because you are not making easy and inexpensive cosmetic improvements?

If you choose not to update your property to compete with the cosmetic features found in competing units, that might be an acceptable trade-off for you.

Perhaps you are willing to accept that it will take a bit longer to find a tenant or you may not get the same rent as before but you are still positively geared.

You’ll do your homework and make an educated decision about how long the high vacancy rates will last and if what you will earn meets your investment goals.

Expect ups and downs in the market value

Any investment will have its ups and downs. Work with your investment adviser to keep a balanced portfolio that can absorb temporary reduction in rents while the market adjusts over the long-term. A good investment property will continue to increase in value over time.

Be objective about your property’s performance

The same sort of analysis and objective thinking applies to all of the other aspects of managing your investment property. Set up a meeting with your trusted advisers for an annual review of your property’s performance. As you continue to build equity in your assets, your ability to make additional investments and obtain financing will grow.

Happy Investing!

We want you to be a successful investor and will support you any way we can.

While this guide doesn’t cover everything you’ll need to know before jumping in, it gives you an idea of what to think about, understand and prepare before signing any contract.

Surround yourself with knowledgeable people, including your lending specialist and proceed with confidence.

Why choose Mortgage House?

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.

If you’re thinking of investing in real estate, you can contact us for advice about the best options for you when it comes to your mortgage. The cost of your mortgage can drastically affect your financial planning, so it pays to speak to the experts about it.

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Mel

Mortgage House were very helpful. I was extremely nervous about the process of refinancing however, Brij, my consultant made everything easy for me and was really supportive throughout the whole process. The process was also very quick. I would highly recommend Mortgage House.

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Linda

Thanks Jason Seeto for your excellent customer service and support during my Homeloan application! Definitely recommend you for always going above and beyond expectations and being so easy to deal with. Explaining processes and fine lines in detail, ensuring that all information is understood before signing/proceeding. Thanks heaps and look forward to working with you again in future!

“Outstanding”

Sam

Having been a disgruntled bank customer for many years – I finally made the decision to switch, my only regret is I should have done it years ago. The process to refinance was easy to follow – my lending officer (Kevin Paredes) did an outstanding job, he was clear and concise and was readily available when required. I have already recommended MH to my family and friends & will continue to do so moving forward.

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I refinanced and the process couldn’t have gone more smoothly, great communication throughout the process made it stress free. All staff very professional and made jargon easy to understand. Not to mention a great highly competitive variable rate that the other lenders couldn’t match. Have already highly recommended to friends.

Purchase price	Year 1 depreciation	Year 1-5 cumulative depreciation	Total depreciation (40 years)
$810,000	$10,300 – $13,800	$37,800 – $50,800	$460,000