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What if I have no deposit for an investment property? |
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What you mean is that you have no cash deposit. Cash is not really necessary when you have equity in your own home. Having sufficient assets against which to borrow is all that is required and in this way, you can borrow the full amount plus all the additional costs. |
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Is property investment still OK if inflation is low? |
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It's not so much the absolute capital growth rate that is important, but rather the growth relative to inflation. With capital growth historically averaging between 2% and 4% over and above inflation, even if inflation were to fall, I would still expect property to perform at this level above inflation. Everything needs to be put in true perspective and if inflation, and consequently capital growth, is lower relative to everything else, property should still be better than any other form of investment. Furthermore, interest rates would have to fall, reducing the cost of the loan to such an extent that the overall rate of return (above inflation) on the property investment should remain about the same. |
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What if interest rates rise? |
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I personally recommend fixed-interest loans. If the rates rise, then you are insulated against rising repayments. On the other hand, if rates fall you should still be smiling. Have you noticed how low interest rates are usually followed by an increase in property prices? Also, if variable rates do rise, you are buffered by the tax refund. |
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Won't there be a glut of vacant properties when everyone discovers the advantages of owning rental property? |
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Firstly, let me remind you of the number of people who take any step towards becoming financially independent - there's such a small percentage of the population in the running to buy rental property. Secondly, people have been renting property since time eternal, and with more than 30% of the population renting, and this percentage increasing, tenants will not disappear overnight. There should always be a pool of tenants looking for rental accommodation and it's up to you to make your property most desirable. Supply and demand in rental properties is cyclic and vacancies can and do occur from time to time. But there are certain things you can do to keep this time to a minimum. Choosing the right property in the first place helps and well-located, well-maintained properties with reasonable rents attract more tenants. |
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I've been to several banks and they all say I can't afford an investment property. Where do I go from here? |
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It's quite common to find people turned down for a property investment loan, even though they feel sure they can afford it. Don't be disillusioned if your first approach to a bank is unproductive. It's up to you to prepare a budget and an assets/liabilities statement to not only assure yourself that you can do it, but also to assure the financier. In some cases, the financial institution won't have taken the tax refund into account, and this can make all the difference. Don't stop at the first "no". The great American baseballer Babe Ruth failed to get to first base just as many times as he hit a home run. Continue until you find a manager who will listen. |
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Most people seem to emphasise Location, Location, Location. Should I buy prime residential property? |
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Property in prime locations does experience strong capital growth, perhaps slightly higher than normal, however the real return cannot be measured by the growth alone. There is not much point in purchasing a property one street back from the main shops if you have borrowed money using a principal and interest loan over 10 years with an interest rate of 18% and the property is so run down that nobody wants to rent it. I believe that property that is well-located, properly financed and properly managed will outperform property selected on the basis of position alone. |
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What if real estate prices stagnate? |
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Holding onto the house for at least 10 years should ensure a buffer against any cycles in the market. It's important to keep sight of long-term goals and not be distracted by any short-term hiccups. What happens to property values from one Christmas to the next should not concern you and although property can be cyclical, history shows that around 10% to 11% growth can be achieved long-term. More importantly, long-term property growth has performed at several percent above inflation. |
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Are units better than houses? |
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There is not a simple yes or no to this question. There are many financial factors to be considered as well as personal preferences. Houses may, and I say may, experience better capital growth because of the higher land content, but the maintenance could be higher and the yield (rent/value) could be lower. So in the longer term, the overall returns from units could be the same as for houses. Also, it's a case of horses for courses and the different tenant profile in some locations predetermines the suitability of houses, units or flats. Around the city centre, units or townhouses may suit the young professional couples whereas in the suburbs, young families might be more attracted to houses. |
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Do I have to get deeply involved if I invest in real estate? |
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No! Real estate is only the vehicle for building wealth - a means to an end and not the end itself. The great thing about property investment is that you can do as little or as much as you want to. You can do all the maintenance and bookwork yourself, or you can employ someone to do it all for you. The returns from property can be so great that you can afford to pay to have all those things done that you don't like doing or don't have time for - they're tax deductible anyway. A good property manager helps and he can do most things from paying the rates to arranging for the shower to be fixed or making insurance claims if necessary. The degree of involvement is entirely up to you. While doing everything yourself can increase your overall returns, weigh up the real cost in terms of family life and your peace of mind. |
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I have $300,000 in equity in my own home. How much can I afford to borrow to buy more property? |
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It's not just a case of how much property you have to borrow against. It's just as important to consider your ability to service the loan. I have known people who own several million dollars worth of prime rural land, but because their income is limited, they are not capable of borrowing very much at all. No matter what the value of your properties, when it comes to borrowing money, we are generally limited by cash flow. |
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My wife and I live in a house worth $300,000. Would I be better to sell and buy a cheaper property in which to live and use the excess money to buy rental property? Or should I stay put and borrow against my home to buy more? |
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Economically speaking, you should downgrade and put the excess into rental property where you will be able to have more property working for you. However, when you are deciding just how much you want to invest, it's important to take personal considerations into account. You could live in a tent and own 10 investment properties or you can live in a mansion and have nothing else. Somewhere between the two extremes you'll find a happy medium. |
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I don't seem to have much spare money as it is now. How am I going to afford to buy an investment property? |
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If you have already made the commitment to pay for necessities first and luxuries last, then the only remaining stumbling block is more of a perceived problem than an actual problem. Too often, we think of an investment property in the same light as our first home. This being the case, we tend to see only the interest payment as creating an enormous burden. But your contribution to the interest bill, remember, is after the tenant and the taxman have paid their share, and what's left may be as little as $80 in the first year - and it gets less over time as the rents increase. In addition, section 221D of the Taxation Act may help you to improve your initial cash flow through reduced PAYE tax instalments which means you don't have to wait up to two years for your tax refund. |
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My wife isn't keen on the idea of buying an investment property in my name only. Is there an alternative? |
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There's not much point in putting a negatively geared property in joint names when the wife is not working, just in case of a marital break up. It is most tax advantageous to buy the property in the name of the highest-income earner. If you are at all worried about divorce, get a solicitor to draw up a written statement as to the equitable division of all your assets, regardless of title of ownership. This may only cost a small amount, compared to the thousands of dollars of potential tax savings.
Alternatively or additionally you could have the Investment property purchased in joint names even if it is only 1% in one partners name, the other cannot then sell it without the others permission and signature on the sale documents. Tax deductions are then proportional but still 99% would be in the higher income earners name. |
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I've spent a long time looking for a good property but I seem to keep missing out on the real bargains. How long should I look before buying an investment property? |
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It's my opinion that the "once in a lifetime" bargain comes along about "once-a-month". However, try to remember the real costs in chasing a bargain. If you are investing longer-term, there's no need to spend six months of your valuable weekends in a real estate agent's car chasing that elusive bargain. Time heals all wounds, and so long as you pay fair market price (a little homework should determine what this value would be), you should still achieve sound capital growth. Don't buy the first property you come across, but on the other hand, don't go out with any preconceived ideas of what makes the perfect investment property because you'll spend a year looking for something that may not exist. Spend at least a month familiarising yourself with values in your area, so that when you do find that "right" property, you'll immediately recognise it. |
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With an interest-only loan, when do I actually get to own the property? |
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While it is true that, with an interest-only loan, there is a perpetual debt on the property, you retain title to the property at all times. Whether you ever get to "own" the property outright is irrelevant. What is important is your equity in the property and how fast it increases over time. Eventually the debt will be insignificant compared to the property value. Reducing the principal reduces the interest claimable and you'll then pay tax on the rent. So why pay it out? The only loans you should pay out while you are building wealth are those that are not tax deductible - such as the loan on your own home or car. |
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Will they ever get rid of the capital gains tax? |
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Revenue from the capital gains tax is now firmly entrenched in the government's budget. Since it was introduced in 1985, billions of dollars have been collected as a direct result of the tax and to remove it now would mean drastic cuts to sensitive areas such as education and health. For this reason, I believe it is here to stay. However, it is not the bogey it is made out to be and it should not really affect long-term investors. If you don't sell, you don't pay and because it applies only to gains above inflation, it is usually minimal if you do sell in the long-term. The tax was intended to encourage long-term investment and discourage short-term speculators - and this it does very effectively. |
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We were brought up to believe that we shouldn't borrow money. Were Mum and Dad wrong? |
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Yes and no! The golden rule of borrowing money is to borrow for appreciating assets such as property, not for consumables that depreciate in value. Our parents were right in deterring us from borrowing money for cars etc, which ultimately are worthless. However, no one bothered to explain to them that debt, if used for appreciating assets such as property, is a most important tool in building wealth. |
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Why hasn't my accountant told me about investing in property? |
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When you go to the garage for petrol, does the mechanic come running out to suggest that your brakes need checking or that it's time for a tune up? We probably expect too much of accountants. They should be able to answer all of your questions competently, but don't expect them to be creative in guiding your wealth creation program. Accountants are usually specialists in their area of expertise - accounting. They will expertly complete the tax forms for you after you have provided them with all the figures. They are usually not specialists in property investment and should never be relied on as such. However, there are some accountants who do specialise in property - and even have some rental property of their own. |
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What if negative gearing is abolished? |
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The government has already made the mistake of abolishing the right to claim interest losses from rental property against other income. The turmoil in the rental market that occurred when investors took flight was so great, that it was reintroduced within two years. I believe the government is unlikely to make the same mistake twice. But in the unlikely event that it does, I wouldn't expect the change to be retrospective and it would be a matter of adjusting the debt to balance the rental income. |
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I knew someone who had a fantastic business as an owner-driver of a concrete truck. He purchased two investment properties but when the recession came, his business declined and the banks foreclosed on the mortgage. Does this mean that buying rental property is only for those with a secure income and not for the self-employed? |
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What is a secure income? No job is 100% safe and the precautions you take with your investment properties are commensurate with the degree of risk you attach to your current employment. For example, a government employee with a seemingly "secure" job may only need to have cash in the bank, access to a lot of credit cards and a "check-book" type mortgage. On the other hand, a self-employed truck driver should take all the above steps as well as disability insurance, income-replacement insurance and possibly mortgage repayment insurance. Don't let the prospect of losing your job prevent you from undertaking a loan for a rental property. Simply take all the necessary precautions in case the unexpected happens. |
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Is a holiday unit at the coast a good investment? |
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It can be if you are careful to distinguish between an investment and a luxury. If purely for investment, the returns can be as good as permanent lettings if it is let for half the year at twice the normal rental. This means that you use the unit when it is not let rather than letting it when you are not using it. If however, you want it solely for your own holidays thinking it will serve as an investment as well - think again. None of the expenses (including interest) is tax deductible. By the time you have created your wealth, you should well be able to afford a luxurious holiday unit that you can use at any time you so desire. |
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We seem to be in the middle of a recession. Is it still a good time to buy rental property? |
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The herd mentality of the population is such that everyone buys when everyone else is buying and sells when everyone else is selling. (Statistics show that most investors bought in the midst of the last property boom when interest rates and property prices were at their highest!!) Successful investors look on a downturn in the economy as a great time to buy and they then take all the necessary steps to ensure that they are able to hold long-term to reap the rewards of future recovery. |
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