There are lots of things you need to do to minimise mistakes when purchasing an investment property. There are also some traps you need to avoid, here are a few:
Not having a financial buffer
Investors should have a “rainy day” reserve for unexpected events such as lack of rent through tenant vacancies, repairs or rises in interest rates.
Choosing a loan based on interest rates only
You need to remember that interest is only one component (albeit a pretty important one) of your finance package. Factors such as flexibility, annual fees, break costs for fixed loans and ability to pay interest only are other important points.
Overlooking acquisition costs
Every time you purchase property you will need to consider Stamp Duty costs (which vary between states), registration costs, land tax, conveyancing, body corporate fees, insurance etc. These need to be factored into your calculations.
Buying an investment property to get a tax loss
Investors need to understand the effect of negative gearing on their after tax cash flow as this is one of the most misunderstood areas of property investing.
Not claiming depreciation
I recently met with a client who had been using another accountant and had acquired a new investment property 4 years ago. There were significant capital allowances and depreciation claims which had never been made on their behalf in the last 3 tax years (so we are now in the process of amending these returns). These claims can be substantiated using a report from a qualified quantity surveyor.
Not structuring your loan properly
If you have separate loans for your private residence and your investment property, you should negotiate with your bank to ensure that any principal repayments you are making are made only against the loan on the private residence. You should be paying interest only on the investment property loan as this will maximise your tax deductible interest claim and reduce your non-deductible debt quicker.
Inadequate landlord insurance
These insurance premiums are tax deductible and provide important protection for the landlord.
Not understanding the property title
Properties that are not on a free title are sometimes called strata or community title. These properties will usually have a sinking fund or maintenance levy which is operated through a body corporate or owners corporation. You need to be aware of the likely future costs you will face.
Buying the wrong property
Many investors do not do enough research on buying the right property. The bottom line is you need to do a lot of leg work, speak to a lot of people including real estate agents and other property investors, get a lot of advice, get pre purchase building and pest inspections, get a second opinion of the market value of the property as well as the likely rental value and keep your bank in the loop regarding valuation.
Using a professional residential property manager should generate benefits which significantly outweigh the costs you incur and will also save you a significant amount of time and stress.
Being too tight with your maintenance
This is important because being cheap may result in injuries or damage for which you are liable but it will also mean that fewer tenants will be prepared to rent your property.
I hope these points assist you with your property investing. Remember – there is lots of great reading info out there in relation to property by people such as Jan Somers, Margaret Lomas and Michael Yardney.
If you need any ideas or a push along with getting into property investment, be sure to speak to your accountant at Green Taylor Partners.