The pros and cons of residential investment properties
The pros and cons of residential investment properties
The rise in capital city auction numbers and home values across the country signify that the Australian housing market has bounced back. With this, we’re also seeing that the value of new investor loan commitments is trending upwards. Before you commit to such a significant investment, it’s important to consider all the factors concerning investment properties to ensure that your decision is as informed as possible.
The benefits of residential investment properties
Most people will look to invest in property for the money they can make when the property increases in value and they decide to finally sell it. However, there are several other benefits to owning a property.
- Income through tenants
Owning property is a great way to earn passive rental income through a tenant. They key here is to aim for earning rental income which is greater than your loan repayments, utilities, and maintenance costs. This will almost never occur in the first couple of years but will generally improve if rents increase over time.
- Reinvesting
One of the most popular property investment strategies is ‘reinvesting’. This is where a buyer purchases a property in an affordable area but rents, and lives, in a more expensive area that is above their purchasing budget. The income they earn from their investment property is then used to cover as much of the rent, and other costs, of the more expensive rental property they live in. Any excess is reinvested in repairing and maintaining the affordable property to improve the chance of price improvements over time. A mortgage offset can help to ensure this arrangement is flexible.
Furthermore, if the rental property in the affordable area was originally used as your main residence, capital gains tax may be reduced.
- Tax Benefits
As a property investor, and subject to some limitations, you’re able to claim the interest charged on the property as a tax deduction. In addition, if your costs incurred such as interest, depreciation and maintenance exceed your rental income, you may be entitled to use this loss to reduce your taxable income. The tax benefits become more favourable for higher income earners and can be amplified when used in conjunction with the reinvesting option above.
What are the disadvantages of residential investment properties?
The most immediate risk is that the property costs you money to own and reduces in value over time. Alternatively, if you make money through a tenant, your taxable income will increase, and you will have additional tax payable.
Get expert investment guidance
Property investing can be a very lucrative option for many people. It’s important to consider all factors involved, including your financial circumstances, your objectives, and your risk appetite based on the current property investment market trends. While we at My Tax Accountant can provide expert tax advice concerning the ownership of rental properties, financial advice should be sought from a financial advisor to assess whether purchasing a rental property is right for you. This article is general information only and should not be considered financial advice.