Rental First
Buyers and sellers will see a significant change to the dynamic of the Sydney housing market in 2016, according to Domain.com.au.
The changed market conditions mean property investors will need to take extra care in managing their assets. The professional management of rental properties and the careful financing of new real estate purchases will be important issues for new and existing property investors in 2016.
Dr Wilson from domain.com.au said the extraordinary price growth reported in Sydney, over the past year will not be matched over 2016.
“Despite higher interest rates, investors will be drawn to the relatively high yields available and continued taxation advantages – particularly for small-scale investors.”
Here are some suggestions on how investors can expand their property portfolios regardless of the market conditions.
Managing risk
whether or not you are a first-time investor or already started your property portfolio, one of the first things you should do is to understand your capacity to take on debt.
It is so easy to take on debt, it is investor’s responsibility to carefully analyse their personal circumstances and serviceability of debt. Consider what would happen if you suddenly moved from being a two-income household to living off one income. Would you still be able to service an investment loan? Do you have access to other income sources in this happens? What is your recovery plan?
Once you have established how much you are able to borrow, you should build in buffers. It is inevitable that interest rates will go up by 2 per cent, or that, at least once in your property life cycle, your property could be without a tenant and income for six to eight weeks. It is smart to plan for these occasions as you will cope a lot better if they do eventuate.
Interest-only borrowing
Frequently, investors take out interest-only loans in order to keep down their property related expenses while they wait for capital growth to kick in. This scenario can work well, but only if the value of your investment property grows – therefore you need to think about protecting yourself and your investment.
Typically, interest-only loans cost less in repayments and give you greater flexibility and leverage ability. However, when one has a principal-and-interest loan, repayments are higher and lender reduces your loan limit daily.
The inconvenience of interest-only borrowing is that if property markets fall or stagnate for a long period, investors with interest-only loans are likely to lose money. This approach is quite risky as you are gambling that a future capital gain will cover the high cost of interest bill you paid and the principal cost, which you may not have paid down at all.
Tax breaks
Wether you are new or existing property investor, you must aim to secure every tax benefit you are entitled to.
This is the area where many investors have lack of knowledge. The standard deductible expenses of interest, repairs, management fees, insurance and council rates come to mind first, but other allowable expenses can be often missed. These include depreciation, borrowing expenses and land tax.
Borrowing expenses include loan set-up fees, rate lock-in fees, solicitors’ fees, mortgage registration fees and stamp duty on a mortgage – are not allowable as deductions in the first year of expenditure.
In the years to come though, they can be expensed over five years. If your borrowing costs total $2,000, you can claim $400 a year for five years, as long as you have all receipts.
Paperwork
Wether you buy a near-new apartment or an older property, the vendor may not pass on the property’s depreciation report, if one exists. This can be fixed by hiring a quantity surveyor to produce a new property depreciation report.
A knowledgeable surveyor will identify all depreciable costs that can be written off against tax. Surprisingly, substantial claims can be made for depreciating the building structure of newer apartments as well as for replacement kitchens and bathrooms, renovated living areas, replacing hot water systems and even the curtains.
Depreciation is a far more valuable property loss to have on your books because it is generated at little or no cost to the investor. It an also deliver you a deduction from council rates or mortgage interest, which in turn could reduce your expenses and increase property value in your eyes.
Repairs
Only repairs to your investment can be claimed as a deduction against your rental income. Property improvements do not classify as repairs.
However, improvements and renovations must be depreciated over a number of years. The Tax Office pays very close attention to this area.
You must remember there is a fine line between definition of a repair and an improvement. Seek advice and don’t assume that every dollar you spend on an investment property can be claimed as tax deduction.
Contact Rental First on 0452 383 677 or enquire online http://www.rentalfirst.com.au/for-owners/.
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