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Thinking of an investment property?

A colleague recently told me he was planning on buying an investment property in Queensland in what might be called an unfashionable area but he thought it had potential. He wanted to know how I buy real estate and my recommendation shocked him.
Be professional
Experience has taught me that for investment properties in particular, the best way is to adopt a business-like approach. My answer in a nutshell is to employ a business plan. After all, the venture is a business deal, which brings tax advantages and being a property investor or landlord means you will receive income and incur expenses.
Think about it, if you were buying a business you would, at least, use an expert such as a business broker or an accountant to see if the purchase price and the potential flow of income made economic sense. And the really smart operators would draw up a business plan.
Horses for courses
First you have to work out what kind of property you want to buy and the decision should be considered in light of your relative tax position.
If you were paying big taxes, you could use the property play to reduce your overall tax bill and that means a negatively geared property would fit the bill.
Get the data
Here you would factor in the expected capital gains when looking at your return on investment. Groups such as Residex and Australian Property Monitors can produce historical information about the average price rises in the area you are looking at.
Peas in a pod
It’s easier if the property you’re buying is typical for the area. In an area like Paddington in Sydney, many of the homes are three-bedroom terraces but if you were buying a cottage built in the ’30s the general price information for the area might be a little misleading.
Whatever the case, you need to get a good handle on the potential capital gain and the likes of Residex can give you street history of prices.
Consider being positive
If you don’t want tax savings, a positively geared property could fit the bill. Here the income from the rent outweighs your interest bill and other expenses. These properties often don’t have fast capital gains but some are a surprise because they become popular residential areas. Townsville has been a case in point.
Turning positive
Some properties start negatively geared but especially with newer ones, the tax deductions that can be expertly identified by quantity surveyors can mean you end up with a cash flow positive property. Simply, your money going out is surpassed by the rent and tax deductions so you’re left in a positive cash position.
These places can also have good capital gain dividends but you have to do professional research to find these sorts of properties.
Check the expenses
Once you’ve covered the income - short- and long-term - you then look at expenses. Lawyers’ fees, building as well as pest inspections are needed and you can’t forget about insurances. Landlord insurance is now available and this can help with troublesome and costly tenants.
Worse case scenario
Think about all the things that can go wrong - such as a tenant who doesn’t pay rent - and have a risk management plan in place. Check references and specify clearly what the arrangement will be. Most investors use real estate agents to manage the property but make sure you read all the fine print with the agent and know all potential costs.
Newer buildings have less maintenance costs but with home units there’ll be contributions to a sinking fund and maintaining the block.
Diligently track down all the obvious and less obvious costs. Experts are worth hiring for this but you can do all the legwork and save plenty.
Get help
Prepare a list of all the expenses and talk to an accountant or go to the tax office website to see all the potential tax deductions. Some are immediately deductible but things such as substantial renovations and the costs of acquiring the property will be recoverable if you sell to reduce the potential capital gains tax.
Reap the benefits
Yes, you’re up for capital gains tax when you sell an investment property but there are some loopholes that could reduce or eliminate it. Do your homework like a business buyer or seek out an expert.
It’s absolutely false economy to run away from expenses that could save you or make you money.
After doing all your homework, you should be able to draw up an expected profit and loss statement on the property - just like a business - and if the numbers don’t stack up, then go looking for another property.
Pay for advice
Once you have all the information, running it by an accountant to see what your tax position will be is a good last-step measure. It’s a very business-like thing to do!

All too often we let emotions drive an investment in a purchase involving hundreds of thousands of dollars, which can, regrettably, end up in tears. 

Published on: Wednesday, October 03, 2007

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