FAQ’s – Real Answers To Real Estate Investment Questions
With a plethora of information, services and products flooding today’s housing markets, it’s not surprising that beginning investors can become so overwhelmed at the prospect of making any type of purchasing decision that they indefinitely delay that essential first step toward financial freedom.
Majestic Property wants to eliminate those first time jitters, because we feel financial independence in retirement is something every Australian deserves and should strive for.
Moreover, we feel most working Aussies can achieve this independece through well-selected and carefully acquired investment property that aligns with your own personal strategy and objectives.
As such, here are some commonly asked questions about residential property investment, and the answers that will hopefully allay any fears you harbour, in order to take control of your financial future.
Q: What is residential investment property?
A residential investment property is a house, townhouse, villa, apartment or unit, not used as the owner’s Principal Place of Residence(PPOR), but rather rented out to tenants.
Residential property is considered a favourable asset for long-term investment in particular: due to the varied benefits it offers as a relative low risk, high return investment vehicle (with optimal assest selection).
Well purchased residential property assets can be virtually self sustaining, with a number of cashflow streams provided from tax advantages and rental income, alongside strong potential capital gains.
Q: What is “negative gearing”?
When an investor borrows money to buy a property, if the combination of the interest on the loan and associated holding costs add up to more than the income derived from rent, the investor can deduct the shortfall in interest payments from his or her income for tax purposes.
The principle behind negative gearing is that the money paid towards interest on a loan and expenses incurred in maintaining the investment (e.g. rates, insurance etc.) is money spent to earn tax assessable income.
Q: Should I consider this a short or long-term investment?
Experienced investors understand that investing is a long-term proposition, where true success is often realised over a lifetime.
This is an investment vehicle that requires patience, time and a strategic plan to build real wealth. As such, it’s important that investors think beyond one New Year resolution to the next, and instead embrace the need to plan ahead for the next ten, twenty and thirty years.
Q: What if i don’t have enough money for a deposit?
You’d be surprised to know how many present day homeowners are sitting on a goldmine of investable equity in their own home. The truth is cash deposits are virtually unnecessary when you have sufficient assets to borrow against.
If you have enough equity in your own home, lenders will allow you to use this as security for your investment property (with the usual serviceability provisos of course), so there’s no need to “save up for a deposit.”
In fact, it can take you such a long time to save for a deposit that when you’ve finally got ‘enough’, property prices may have increased and you’ll have missed that capital gain for yourself.
Q: Should the property be purchased in joint names?
Structuring your property acquisition to optimise cashflow benefits and long term gains is essential to property investment success.
Therefore, you need to determine the best purchasing entity on a case-by-case basis, depending on your overall investment strategy and objectives.
An important consideration is the investment’s tax effectiveness, meaning it might be more efficient for the property to be owned by the highest taxpayer.
We recommend that you consult your accountant and/or financial advisor for the best arrangement. If you don’t yet have these professionals on side, rest assured that we partner with some of the best in the industry.
They provide clients with a professional property investment service and we’d be happy to refer you to the expert we feel best suits your current circumstances.
This is a critical aspect of the property investment process, because inappropriate ownership structures can be costly to fix and may inhibit the timely growth of your portfolio. As such, it’s important to get the right information from the beginning.
Q: What if I don’t have time to manage my own investment?
Maintaining control of your investment doesn’t have to mean active involvement in every aspect of its management. In fact, we recommend that investors take a back seat in the day to day running of their asset as a rental property.
Once a property is purchased, your participation can be reduced to a minimum through the use of an experienced and efficient property manager.
Again, professional investors understand the power of leverage. And that’s not just isolated to leveraging other people’s money, but across all areas of life. Especially when it comes to their time.
The right property manager will save you money, headaches and most importantly…time by assisting with some or all of the following:
- Tenant screening
- Rent Collection
- Preparation of the lease
- Property inspections
- Tenant relationships
It’s important to engage a property manager who runs their agency’s rent-roll as if it were their own business.
Q: What if interest rates increase?
Every investor has a different personal risk threshold. For some, the prospect of facing increasing interest rates in the future can be enough to delay taking positive steps to secure their financial future.
There are ways and means to address this concern however. Perhaps you’ll gain peace of mind by either partially or fully fixing your loan for a term (say 3 to 5 years)? By doing so, you’ll have two distinct advantages for running your property business:
The amount of interest paid will remain consistent for the duration of the fixed term, even if retail rates increase.
Because you know your repayment amount in advance, it’s easier to budget your cashflow and plan ahead.
It’s also important to recognise that effective property management will see your rents rise in accordance with inflation at the very least. And sound cashflow management, along with investment in high growth assets, should shelter you from interest rate fluctuations. Along with careful financial planning and management.
Please consult your finance professional for the best arrangement for you.
Q: What if I need some money in a hurry?
Residential property offers a lot of flexibility for the investor. If for some reason you need money in a hurry, some lenders will allow you to draw on the equity from your own home or investments by refinancing.
It’s important to note however, that at time of writing regulatory restrictions imposed on banks have seen tighter restrictions around this practice. Most lenders will require written proof of how you intend to use the funds and can decide at their discretion whether the reason is sufficient.
Ideally, all investors should have a cashflow buffer in place as well. This can generally be in an offset account or Line of Credit attached to your non-tax deducible mortgage and is intended as a safety buffer for those ‘just in case’ moments.
If you already have an established line of credit, you’ll have access to the money before you need it.
Q: What if I don’t feel comfortable about going into debt?
If you genuinely don’t feel comfortable going into debt, don’t do it. If you at all believe though that this fear may be irrational due to some of the major influencers in your life, it could be worth having a second look at where your concerns originate.
All too often, we allow the fears of others to impact our own personal journey. Those who haven’t yet achieved their own financial freedom might inadvertently scare you into inaction, because they don’t want to get left behind.
Generally, most of us have been conditioned to be afraid of debt due to the way our parents, family or well-meaning friends perceive it. Then of course there are the experiences of youth, when we’re likely to struggle with compounding debts from buying depreciating items like cars, TV’s or even funding lifestyle and holidays with high interest credit.
While there’s some relevance in this viewpoint, we shouldn’t just perceive all debt as something bad to be avoided.
Going into debt for consumables and depreciating items such as televisions and holidays can certainly destroy your opportunity for future wealth. However, as author of best selling book Rich Dad Poor Dad Robert Kiyosaki states, using leverage – that is debt for the purpose of accumulating assets such as appreciating investments – can build wealth.
There are two principles that will ensure your security when it comes to borrowing:
ONLY borrow to purchase appreciating assets and those that generate cashflow.
Make sure your debt is manageable.
Q: What if I have a bad tenant that damgages my property?
With the right property management, tenant difficulties should be reduced to a minimum. Plus, comprehensive insurance policies are available to investors that protect your investment against most forms of damage or cashflow disruption, including:
- Rental payment defaults
- Tenants vacating without notice
- Denial of access by tenant
- Breaking of lease
- Malicious damage and theft
Further, the risk of selecting an undesirable tenant will be reduced with effective property management processes to screen and identify rental applicants.
Q: What is LMI – Lenders Mortgage Insurance?
LMI (Lenders Mortgage Insurance) is a fee that banks pass on to some borrowers, depending on the size of the mortgage you apply for. Different lenders have different LMI thresholds according to the loan to value ratio. Most will charge some level of LMI if you borrow more than 80% of the property’s value.
The bank outsources insurance to protect themselves from the risk of higher lending ratios, in case of a default on the loan. In most situations LMI shouldn’t be a deterrent if you are purchasing a growth asset like property. Over time, it’s expected that the increase in wealth from the property will be significantly higher than the cost of LMI.
We’ve seen banks charge anywhere up to $20,000 or more for LMI depending on the financial position of the applicant. This isn’t always a fixed fee, although it’s perceived that way. We recommend that you seek advice on ways to reduce LMI before signing loan contracts with a bank.
These frequently asked questions are a good reflection of most people’s initial experience with investing, and why seasoned investors always seek out and pay for quality advice.
The costs associated with making an incorrect move based on poor information and subsequently having to address the problem, particularly at the beginning of your journey, can be great and two-fold, as you risk losing valuable time and equity.
Avoid this scenario by considering those questions most relevant to your own personal journey to financial freedom and then seeking answers from a suitably qualified and experienced industry professional.
Better yet, why not call us here at Majestic Property? We can set up a no obligation meeting to discuss where you currently are, where you hope to be in retirement and the ways investing in property with the right kind of partner can take you there.