Buying an Investment Property

Despite 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. 

Although 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. 

This 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:

1. Cross-border commercial investment property purchases increased from 30% to 40% in 12 months, with Europe and the US favoured most.

2. It is 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.

3. The current non-residential Australian property market is worth $A263 billion.

If 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
This 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:

1. Are more businesses moving in than businesses moving out?

2. What do the commercial investment property reports say?

3. What has happened to property values over the past 15-, 10- and 5-years compared to other similar areas?

4. Is there an influence that can have a bearing on the investment property pricing in this area over the next 5 years?

5. What 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?

It may seem obvious, but commercial properties need to be in the close proximity of major cities if you want really good returns on your investment. 

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.

Interest rates: 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 as possible.

Accounts: 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.

Taxes: 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. 

Disclaimer:

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.