First Home Property Buyer s Investing Guide Guide

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1 First Home Property Buyer s Investing Guide Guide

2 Contents Why invest in property?... 3 Choosing an investment property... 6 Choosing an investment loan... 7 Managing your investment... 9 Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a partly-owned subsidiary of the Commonwealth Bank of Australia ABN AFSL and Australian Credit Licence AHL Investments Pty Ltd ABN Australian Credit Licence Aussie does not provide any financial or investment advice. This document has been prepared as a factual guide only. It does not take account of your objectives, financial situation or needs. Aussie recommends that you seek independent financial advice and obtain your own professional legal and taxation advice before making an investment decision. Page 2 Aussie Property Investing Guide

3 Why invest in property? Historically, property has always increased in value over time. While there may be dips and plateaus, if you re in it for the long term, it is generally considered one of the more solid, less volatile forms of investment 1. Investors tend to like property for its potential: Capital growth (increase in value) Ongoing rental return Tax benefits You don t need a big salary to get started... Lenders consider the potential rental income you ll get from the property when calculating how much you can borrow. So property is a viable investment option, whether you ve bought before or it s your first time. If you already own your home, and have a reasonable amount of equity in it, you may not need to raise any cash to start investing. Many lenders may let you use that equity as a deposit for the investment property as long as you can comfortably manage the repayments on the loan. But if you don t already own a property don t be put off. If you have a deposit saved, an investment property might be a good way to get into the property market and earn a regular return on your investment. The return on your investment As a property investor you can expect to earn two quite distinct types of returns: Capital growth It s where the value of the property rises over time allowing you to make a profit on the sale of the place Rental income Ongoing rental income you ll be entitled to during the rental period or your investment property There are a few important points to note about capital growth and rent: 1. Firstly, in order to make capital gains on the property, it will need to rise in value by more than the costs of buying and selling the place. These costs include stamp duty, legal fee and agent s selling commission. 2. If you select a well-located property in an area experiencing population growth, there is a good chance you will make a capital gain if you are prepared to hold onto the property for the long term 2. But there are no guarantees when it comes to capital growth especially if you only intend to own the property for a short period. 3. Rental income on the other hand is far more certain. Once a tenant signs a lease they are committed to paying rent at least for the duration of the lease term. 4. It is unusual for a property to deliver both high rental yields (that s the annual rent as a proportion of the property s market value) and strong capital growth over the same period. 5. The trade-off between rental yield and capital growth makes it important for you to consider an investment strategy before you even start searching for a property. 1 MoneySmart.gov.au 2 Institute of Actuaries in Australia, A house or a home? Finding value in Australian residential property, 2011 page 3 Conventions/2011/Con2011_Paper_Street.pdf Page 3 Aussie Property Investing Guide

4 There are two types of strategies to consider: Pros Capital growth The potential for healthy gains in the long term. As a guide, in the 10 years to February 2014, dwelling values nationally rose by an average of 4.4% across Australia s combined state and territory capitals 3 The tax relief that comes with negative gearing * Rental income Low repayments with more rental return Rental income may equal or even exceed the mortgage repayments, which helps with cash flow Depending on the area, it can also have potential for capital growth Cons Other investors have over-extended themselves and been forced to sell at a loss The loan repayments may be more than the rental income and your cash flow needs to be able to handle this outgoing Profit when you sell might not be as great as it could be for a different type of property or a different location Higher cash flow and high yielding properties means that you may pay higher tax on the income Examples A 2 bedroom inner city unit might cost $650,000 to buy, but attract a rent of around $550 per week - a return, or yield**, of about 4% a year. However after five years the property may have risen in value to $800,000 giving you 23% capital growth A 2 bedroom unit in the suburbs might cost only $300,000 but will get tenants paying $400 per week - a yearly return of around 6.5%. However after five years the property may only be worth $330,000 giving you 10% capital growth Additional costs to consider When selecting your investment strategy and what you can afford to spend, you should also consider the potential costs of ownership: Interest repayments If you get a variable loan, factor in higher repayments if rates go up Council rates and strata fees The agent will tell you what these are per quarter but if you re buying a unit get a strata search so you ll know if there are any big special levies in the pipeline Management fees If you have the time and the inclination you can manage the property yourself, but if you use a managing agent, you will be charged management fees usually set as a percentage of the rent Vacancy periods When doing the sums, factor in vacancy periods when you won t receive rental income. Allow at least four weeks of vacancy each year Repairs If it s a house you ll be up for all the building repairs, but even in a strata block you ll be responsible for repairs to fixtures and fittings and any whitegoods and appliances you include with the flat *Negative gearing is when a rental property is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings (Australian Taxation Office The federal government offers you some tax breaks when this happens. To find out more go to 'Tax and your investment property'. 3 RP Data-Rismark February Hedonic Home Value Index Result, 3 March 2014 ( **The property s yield" is a measure of its return. Very simply it s the percentage of the annual rent a property generates calculated against its market value. For example, if a property worth $500,000 commands annual rent of $25,000, its rental yield is 5.0%. To best work out your actual net (after expenses) return, you need to calculate the money received into your bank account after all costs are sorted. Page 4 Aussie Property Investing Guide

5 Don t overlook insurance Buying an investment property is exciting there s also a lot to plan for, and it s important to remember that as soon as you pay a deposit on your investment property you are responsible for the property whatever happens. That can be a scary thought but the good news is that it is easy to manage risk by making sure you have the right insurance in place. Let s look at two main types of cover property investors need to have on board. Mortgage Protection Plan^ You owe it to yourself to decide the best way to protect you and your mortgage - and investment - should the unexpected happen. Mortgage Production Plan is a life insurance product that provides peace of mind if the unthinkable should happen. Importantly, it includes cover for you and your property loan, taking care of some or all your mortgage payments if you become too ill to work, or if you pass away. Aussie offers the Aussie Mortgage Protection plan that provides cover for: Critical illness including 11 serious specified medical conditions Loss of life and terminal illness Involuntary unemployment in the first 12 months of cover To find out more about how to protect your lifestyle with the Aussie Mortgage Protection Plan visit aussie.com.au/mortgageprotection and talk to an expert Aussie Mortgage Broker. Landlord Insurance ~ As an investor it is important to cover yourself against major financial losses from events such as fire, theft and storm, and be protected against tenants who don t pay the rent or cause damage to your property. When reviewing your insurance needs make a list of the key items you require including cover for rental property fittings or furniture. Aussie offers competitively priced landlord insurance featuring: Protection against fire, theft, storm, impact, flood and more Ability to add contents insurance to your policy to cover your property if partly- or fully-furnished Optional Tenant Default Cover Optional Theft and Malicious Damage by Tenant Cover Save money with 25% # off when you purchase a combined landlord and contents policy You can even choose to pay premiums monthly, fortnightly or annually. To find out more or apply online visit aussie.com.au/home-insurance.html and talk to an expert Aussie Mortgage Broker. And the risks As with any investment there is no guarantee that you will get a healthy return on your property. Property prices can drop and good tenants can be hard to find. Do as much research as you can before buying your investment property. ^Aussie Mortgage Protection Plan is issued by MetLife Insurance Ltd ABN AFSL of 2 Park Road Sydney NSW 2000 (MetLife) (Death, Terminal Illness & Living Benefit) and ACE Insurance Ltd ABN AFSL (ACE) (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN AFSL (ALI) and is promoted by AHL Investments Pty Ltd ABN (Aussie) as an Authorised Representative AR of ALI. Any advice in this material has been given without taking into account your personal objectives, financial situation and needs. Please consider these matters and the information within the Product Disclosure Statement (348KB) and Financial Services Guide (156KB) before deciding on this product. ALI may be paid a portion of the premium as commission from Metlife or ACE for each policy purchased. Aussie may receive a portion of the commission from ALI and may pass a proportion of this commission to your Aussie Broker. Your Aussie Broker may also become entitled to other non-monetary incentive rewards. ~Aussie Home and Contents Select Insurance is issued by Auto & General Insurance Company Limited (AGIC) ABN AFS Licence No It is distributed by Auto & General Services Pty Ltd (AGS) ABN AFSL and is marketed by AHL Investments Pty Ltd (Aussie) ABN as an Authorised Representative AR of AGS. Aussie may receive a commission from AGS for each policy purchased. This is general advice only, and does not take into account your particular financial situation or needs. You should consider your personal objectives, financial situation along with the Product Disclosure Statement Part A, Product Disclosure Statement Part B and Financial Services Guide before deciding on this product. # Online discount offer only applies to the premium paid for a new Aussie Home & Contents Select Insurance policy initiated on or after 1st June 2014 and purchased online. We reserve the right to shorten or extend the period the discount is offered and vary the amount of the discount. Base rate premiums subject to change. It does not apply to any renewal offer of insurance. The discount offer applies only to the premium for an insurance product. It does not apply to the fees that we may charge you. (These are described in our Financial Services Guide, which is available at aussie.com.au/insurance). Aussie is a partly owned subsidiary of the Commonwealth Bank of Australia ABN AFSL The Aussie name and logos are trademarks of Aussie. Page 5 Aussie Property Investing Guide

6 Choosing an investment property One of the great things about investing in property is that you should ideally have no emotional connection to the place you buy. That s quite different from choosing your own home where aspects like a building s character or a charming garden or proximity to friends, family or work can be the main drawcards. When you re buying as a landlord it should be easier to take a more pragmatic approach to property location and the tenant appeal of the place should be two key aspects to consider though this will vary depending on whether you are adopting a capital growth strategy or a rental income strategy. The main point is to set your emotions to one side in the buying process. Bear in mind that this is a money-making venture, so buy with your head not your heart. Capital Growth If you re looking for a place with potential for capital growth, it s worth aiming for a property close to the CBD, because scarcity and demand will ultimately push values up. As a guide, in the 12 months ended September 2014 combined state and territory aggregate capital city values rose 9.3% compared to an increase of 3.3% in rest of state values 4. Rental Income On the other hand, if you re looking for a good rental return and a steady cash flow consider buying in the suburbs or regional centres. Prices in these areas tend to be cheaper so you ll get a better rental yield. In both cases, there are some general things to keep in mind when deciding where to buy: Try to avoid places on busy roads or directly under flight paths Waterside suburbs appeal to both renters and future buyers and they tend to at least hold their value Look for locations with access to employment, public transport, schools and shops You don t have to buy somewhere close to where you live but you need to be familiar with the pros and cons of a location Keep an eye on vacancy rates, sales prices and rental rates Look at the interest in the area, the current population growth and the projected population growth There are lots of websites out there to help you keep up to date with property market statistics such as RP Data. There are many of types of property to consider, but most Australians opt to invest in residential property because that s the type they know best. If you plan to go residential you ll need to decide between a unit and a house. Deciding between a unit and a house: Unit House Pros They tend to be cheaper and therefore can provide a higher yield The upkeep is managed by a strata company and if things go wrong, certain costs may be split between all the strata owners They are usually well located and close to amenities which appeal to investors The extra land value can provide a greater chance for capital growth There is good chance of finding a tenant as there are lots of families interested in having some extra room More likely to be able to renovate to add value Cons Strata costs Can be costly to maintain 4 Page 6 Aussie Property Investing Guide

7 Other things to consider when buying an investment property Look for properties with features that will appeal to as many people as possible e.g. second bathroom, balconies or lock up garage Look for a property that will attract more than one segment of the rental market such as singles, couples, professionals, families or retirees. The needs of each segment will vary Renovation can be costly but it should only be done if you think it will increase the value of the property If the tenant complains about a fixture not working, it will need to be fixed Find out if the place was rented in the past: how much it was rented for, if there were any vacancy periods, how long it was vacant for, and why, and whether there has been a high turnover of tenants To find out what is popular in the area you are looking at, talk to local rental agents and ask them about the types of properties in demand. Choosing an investment loan Property investment loans are not too different from regular home loans. As with other loans you can choose between: Variable interest rate Here the rate you pay fluctuates typically in line with changes to the official cash rate. This type of loan tends to have a range of flexible features like redraw however as investors can usually claim the loan interest as a tax deduction there may not be much incentive to pay off the loan sooner. So the features of a variable rate loan may not appeal to investors as much as they do to owner occupiers Fixed rate A fixed rate is often very useful for investors as it provides certainty of repayments. This can be helpful because the rent payments on a property will be fixed during the lease term, and even if market interest rates rise the landlord may not be able to raise the rent until the lease expires. By locking into a fixed interest rate investors have more certainty about the repayments on their property and a more manageable cash flow There are two types of loans that tend to be particularly attractive to investors: Interest only loans Line of credit loans Interest only With most standard home loans your repayments are made up of interest charges plus a small repayment of the loan balance. In this way you slowly chip away at the original amount borrowed over the term of the loan. Where an interest only period is present the loan principal remains the same unless you choose to make additional payments. You only have to pay the original amount borrowed if you sell the investment property. It s worth noting that most lenders only permit interest only repayments for a set period often between five and ten years. After this you will either need to renegotiate another interest only period or start to make principal plus interest repayments 5. Interest only loans can be useful for investors because during the interest only period: Your monthly repayments are less than they would be if you were to pay off principal as well You can get a tax deduction for the interest payments, but not for principal repayments Line of credit If you already own a property, a line of credit offers a way for you to tap into any equity you have built up in that property and, use it as a deposit for your investment property. This type of loan is useful for investors because: A line of credit loan allows you to draw from a fixed amount at any time to pay for any additional expenses It s kind of like a credit card with a big limit but the equity in your home acts as security for the loan Split rate Like home owners, an investor can choose to split their loan between fixed and variable rate components 5 Page 7 Aussie Property Investing Guide

8 Deposit Power Guarantees* A Deposit Power Guarantee can be used as a substitute for a cash deposit when purchasing a residential investment property. You can choose to use a Deposit Power Guarantee for all - or just part - of your deposit, up to 10% of the purchase price. This makes a Deposit Power Guarantee a handy option because you can still sign a contract to buy the property of your choice when you find it. As long as you have the funds available at the time of settlement, a Deposit Power Guarantee puts you in the position to secure the right property including the deposit. Using a Deposit Power Guarantee doesn t remove your obligation to pay the deposit; it just delays payment of the deposit amount until settlement, and allows you to hold on to your funds for a bit longer. If you feel a Deposit Power Guarantee could be helpful for your circumstances, talk to an expert Aussie Mortgage Broker about how to apply. Your expert Aussie Mortgage Broker can help With so many loan options available it is important to have the loan in place that best suits your needs and investment strategy. That makes it worth speaking with an expert Aussie Mortgage Broker who can look through hundreds of investment loans offered by a wide range of lenders to help you make the choice that is right for you. Tax and your investment property Investments should always be selected on the basis of the returns generated and how well the investment will help you meet your individual goals. However property investors can tap into some very useful tax benefits. These include the ability to claim a tax deduction for many of the costs of owning a rental property; the tax benefits of negative gearing; and the availability of capital gains tax discounts. Let s take a closer look at how each of these tax benefits can work for investors. Tax deductions 6 As a landlord you can normally claim a tax deduction for a wide range of the expenses related to your rental property including interest on the loan. It should be noted that these expenses can usually only be claimed if the property is tenanted or available for rent. Your tax adviser can give you a clear picture of what you can claim for your personal circumstances. Though in general the following expenses can normally be claimed on tax: Advertising for tenants and property management fees Loan interest and ongoing loan fees Council rates, land tax and strata fees Building depreciation plus depreciation of fittings and fixtures like stoves, carpets and hot water heaters Repairs, maintenance, pest control and gardening Building and landlord insurance Stationery, phone costs and any travel to inspect the property Accounting or bookkeeping fees The above is not a full list of what you can claim. Always get proper advice from a tax expert before putting in your return. Negative gearing Negative gearing refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your other income like salary and wages. So, say your income is $60,000 a year but your property expenses are $15,000 a year, you ll only need to pay income tax on $45,000. This way you ll pay less tax, but don t be mistaken, it is still a loss that hopefully will be more than made up for by an increase in the property s value over time. Do note capital expenses like the repayment of your loan principal or renovations that add value cannot be claimed as an ongoing tax deduction 7. The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial. Investment properties don t have to be negatively geared. If the rent outweighs the costs of owning the property, it is said to be positively geared and you can expect to pay tax on the profit the property generates each year. *This content has been prepared by Deposit Power Pty Ltd ABN , which acts as Authorised Manager for CBL Insurance Limited RN of Level 8, Tower One, 51 Shortland Street, Auckland, New Zealand, the issuer of the Deposit Power Guarantee. Deposit Power is distributed by AHL Investments Pty Ltd ABN (Aussie). Aussie is a partly owned subsidiary of the Commonwealth Bank of Australia ABN AFSL Aussie does not accept any liability for, nor guarantee payment of any claim or benefit in respect of Deposit Power Guarantee. Aussie receives a commission from CBL Insurance Limited and may pass a proportion of this commission to your Aussie Broker. Your Aussie Broker may also become entitled to other non-monetary incentive rewards. 6 ATO Rental Properties ATO Rental Properties Page 8 Aussie Property Investing Guide

9 Capital gains tax The time may come when you choose to sell your investment property, and if you make a profit on the sale you are said to have made a capital gain. This gain is taxable - the profit is added to your regular income in the year you made the sale, and the tax will be determined accordingly. However there are important capital gains tax concessions available to property investors. Firstly, the cost base used to calculate the capital gain includes the price you paid for the property plus buying like stamp duty and legal fees. Selling costs like agent s selling commission can be taken into account also, which helps to reduce the profit for tax purposes. In addition, if you have held onto the property for over 12 months you may be entitled to claim a 50% discount on the capital gain at tax time. Put simply, if you made a profit of $100,000 on the sale of the place but you have owned it for over one year, you may only pay tax on a profit of $50,000. This represents a significant saving of tax for investors and it offers a good incentive to own the property for the long term. Managing your investment As a property investor you can choose a hands-on approach and manage the property and the tenant, yourself. Or you can opt to use a professional property manager. It s a decision you need to weigh up carefully because while a DIY approach can be a money saver, there are also important legal responsibilities you must meet as a landlord, and it is critical to get these right. A professional property manager will usually charge a management fee set as a percentage of gross rent though this is normally negotiable. In return for this, the manager will take care of the majority of work involved in running the property. These duties may include: Advising you of the appropriate rent to charge Securing quality tenants (often for a separate letting fee), which involves: Advertising the property to let, organising Open for inspection viewings, taking tenant applications, checking tenant references and interviewing tenants Drafting a formal lease agreement Lodging the rental bond with the appropriate agency in your state or territory Organising a written report from the tenant confirming the condition of the property prior to the start of the lease Collecting rent on a regular basis and chasing up late payments Dealing with tenant requests for property repairs or maintenance Providing monthly and annual statements for your tax return detailing the rent received and the total of associated property costs Dealing with difficult tenants including attending any tenancy tribunal hearings on your behalf The bottom line is that some investors get a great deal of satisfaction from managing their own rental property. But if you are a first-time investor or you are pressed for time, it can make sense to use a professional property manager. For the management fee that you pay, you ll have the benefit of a hassle-free investment and you won t have to deal directly with your tenants, which is the option many investors prefer. Page 9 Aussie Property Investing Guide

10 Why Aussie? Buying an investment property is an exciting step! As a landlord you ll be building wealth in a proven asset residential real estate. Just as it s worth taking the time to choose the right rental property, it s also important to select the loan that helps you make the most of your investment. Choose from up to 19 lenders...* Meet with an expert Aussie Mortgage Broker An expert Aussie Mortgage Broker will compare hundreds of loans from a panel of lenders including the big banks, to find the deal that s right for you. Here s how an expert Aussie Mortgage Broker can help you: Aussie Mortgage Brokers could help you negotiate a better home loan deal with your existing lender, which means you don t have to switch Aussie Mortgage Broker can save you time by searching and comparing hundreds of home loans in minutes Aussie s Mortgage Broking service is at no cost to you Aussie has an extensive network of mobile Brokers that can come to you, anywhere and any time that's convenient for you There is no charge for an appointment with Aussie, we get paid a commission by the lender so you're not out of pocket Aussie Mortgage Brokers may be able to get better interest rates for you due to the volume of business they generate with banks and other lenders Award Winning Mortgage Broker Or, choose an Aussie loan Aussie has a great range of loans. It lets you take advantage of: A wide choice of variable and fixed rate options No ongoing management fees A choice of fortnightly or monthly repayments Free additional repayments Unlimited free online redraw on variable rate loans Online account management Talk to Aussie today. Call or click here to request your free appointment. *Not all lenders lend in every state or territory. Page 10 Aussie Property Investing Guide