Buying an Investment Property
the six interest rate increases, Australians still highly favour the
property market as an area of investment, with commercial investment
property an emerging favourite.
This is the bottom line of the DTZ Money into Property Report released on the 22nd of June 2007.
the residential property market is still booming – in spite of
the many prophets of doom - many Australians interested in investment
property have moved their attention to commercial properties instead.
During the 1980s, the surplus of commercial properties that were
developed resulted in low rentals and high vacancies.
subdued trend continued during the 1990s and into the earlier part of
the current decade, making it a lower yield type of investment
property. According to the Money into Property Report, this landscape
is quickly changing and those entering the market now may well hit an
investment property sweet spot.
To get a better idea of the facts, let us look at some key statistical points contained in the Report:
commercial investment property purchases increased from 30% to 40% in
12 months, with Europe and the US favoured most.
expected that cross-border investment property purchases in the Asia
Pacific region will breech $A1.2 billion levels during the second half
of this year.
The current non-residential Australian property market is worth $A263 billion.
you are interested in getting in on this potentially lucrative
opportunity, there are a few things you may want to consider before you
rush off to secure an investment property loan.
Find the Right Property in the Right Place
has very little to do with neighbourhood and everything to do with the
feasibility of an investment property. There are, amongst others, five
very important questions to consider:
Are more businesses moving in than businesses moving out?
What do the commercial investment property reports say?
What has happened to property values over the past 15-, 10- and 5-years compared to other similar areas?
Is there an influence that can have a bearing on the investment property pricing in this area over the next 5 years?
is the vacancy rate of the investment property, what is the duration of
the current rental agreements, what is the value of the rental
agreements, and are there ‘blue chip’ tenants in the mix?
may seem obvious, but commercial properties need to be in the close
proximity of major cities if you want really good returns on your
The ideal timeframe for holding a commercial
investment property is a little bit longer than on residential
property. Some experts advise 10 years upwards, saying that a more
medium term approach helps investors to avoid market swings and to
really capitalise on upward pricing movements over time.
Naturally, fluctuation and risk can be kept to a minimum by avoiding
over-priced properties in over-priced areas.
How does the Investment Property Fit My Pocket?
Sure, you can secure an investment property loan, but that is not the only consideration.
Some lenders impose higher interest rates when they extend an
investment property loan, mostly because chances of default are higher.
To keep your investment property loan interest rate to a minimum,
ensure that your consumer debt is as low and your credit score as high
Take property taxes, utilities, insurance, maintenance and repairs into
consideration. Review the accounts of the investment property very
carefully to establish how much is spent on running costs and how much
revenue is generated. You may also want to consider securing the
services of an inspector to give the building a once over. This is
potentially money well spent.
There is some tax relief (property depreciation) afforded to owners of
income-generating properties by the Income Tax Assessment Act 1997.
Under division 42 ITAA 1997 and attached to Income Tax Ruling 2000/18,
up to 20% of a building’s value could comprise of depreciable
plant. More than 850 items of plant are listed under Income Tax Ruling
2000/18, and is well worth checking out. As a business, your investment
property can claim against tax for expenses related to the preparation
of tenant agreements, collection of rents, property management
services, maintenance, rates, your interest repayments and fees on the
investment property loan, insurance, cleaning etc.
Visit www.ato.gov.au or call 1300 720 092 to obtain accurate, first hand information on what the full tax implications are.
Negative gearing: The
tax deductibility of investment property loan interest rates and fees
on income generating property creates an excellent opportunity –
if applied correctly – to augment your gains and negate the
losses you may experience along the way. In effect, ATO is actually
helping you to ‘do the deal’.
In fact, to counteract
the multiple interest rates increases that affected the affordability
of an investment property loan, Australian States are trying really
hard to compensate by stepping to the line with taxation cuts aimed at
encouraging continued property investment.
The latest was
NSW, who announced during the third week of June this year that
Government will, over the next four years, be abolishing mortgage duty
on investment and commercial properties, as well as cut investment and
commercial properties land tax by 6%.
Given the recovery from the
commercial investment property market slump and the leniency / support
of government from a taxation perspective, commercial property prices
are likely to rocket. Perhaps, for those of you toying with the idea of
making an investment in commercial property, it may be good to get on
board before a prohibitive altitude is reached.
No investment advice provided to you.
This web site is not designed for the purpose of providing
personal financial or investment advice. Information provided
does not take into account your particular investment objectives,
financial situation or investment needs.
You should assess whether the information on this web site
is appropriate to your particular investment objectives, financial
situation and investment needs. You should do this before
making an investment decision on the basis of the information
on this web site. You can either make this assessment yourself
or seek the assistance of any adviser.