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10 Most Common Questions About
Residential Property Investment
1. What is a residential investment property?
A residential property is a house, townhouse, terrace or unit that the owner does not use as
a personal residence, but rents out. This allows the investor to benefit from both tax advantages
and rental income from the property.
2. What is a negative geared property?
The term ‘negative gear’ simply refers to a situation where your cash outflow to maintain an
investment exceeds your cash income from the investment itself.
For example, with a residential property, it the mortgage payment on your property exceeds the
rental income from the property, it is said to be negatively geared. In other worlds, the
investment income is negative, which allows you to claim the interest cots on your mortgage
loan as a complete tax deduction.
Recent studies demonstrate that negatively geared rental property remain the most tax-efficient
investment vehicle in the late 1990’s and early 2000’s.
3. What if I don’t feel comfortable about going into debt?
While the concept of debt may seem disturbing, the reality is we live with debt of one form
or another, and few people attain true financial independence without some form of leveraging.
In fact, most Australians are actually more comfortable with debt than they realise, through
the mortgage on their own home, or perhaps the loan on their motor vehicle, or their furniture.
Many of us are in ‘debt’ to the taxman by virtue of the fact that we earn an income.
There are tow key principles that will ensure security when it comes to borrowing:
- Only borrow to purchase appreciating assets
- Make sure your debt is manageable
4. What happens if my income stops and I cannot service my debt?
With interest rates the lowest they’ve been in years, many families are focused on paying
off their own home as quickly as possible. For example a couple may be trying to reduce the
term of their loan by paying an extra sixty dollars each week. If one partner gets sick, or
loses their job, they may be placed in the position where there is no redeemable asset base to
turn to but their own home. If that same sixty dollars a week were invested in a second house,
the risk may actually be diminished. The advantage of investing in a redeemable asset base is
that, if something happens, the family house is not put on the line - there is something else to
turn to.
Life or trauma insurance and income protection will replace 75% of a person’s regular
income while that person is unable to work.
5. What if I need the money in a hurry?
Residential property offers a lot of flexibility in the 21st century. Today, if your need
cash in a hurry you can actually draw the equity off your own home simply by refinancing.
In a worst-case scenario, if an income stream is cut off for an extended period of time
and there is not other redeemable asset base to turn to, the investment property can be sold
to pay back the loan.
6. What happens if interest rates rise?
If this is a concern, take out a long term or fixed interest loan. This gives the investor
two advantages
- Because the amount of repayment is known in advance, it is easier to plan financially
- The amount of interest paid will remain constant for the duration of the fixed term,
despite a rise in interest rates.
Remember, whenever interest rates rise, property prices also rise, providing the capital
growth in income stream for investors. We only have to look back to 1988 to see an example of
parallel between a rise in interest rates and a peak in the property boom.
7. What happens if I cannot find a tenant for my property?
It has been our experience that, providing a building is in a reasonable state of repair,
and you are not a greedy landlord, you can find a tenant for it.
This is particularly true of the lower end of the rental market. If there is protracted
vacancy rate (for example, anything more than two weeks) it may be a matter of adjusting the
rent slightly.
With the right property management in place, however, vacancy should not be a problem. A
good manager - in the form of either on-site management, or a local real estate agent - should
have ano difficulty finding suitable tenants, with whom they can foster a long term relationship.
8. What happens if a property is damaged or if I have a bad tenant?
A) A comprehensive insurance policy will protect your property against most forms of damage.
The cost of this insurance is minimal and is tax deductible.
If you are correctly insured, an instance such as a natural disaster can actually work in
your favour, by creating a significant tax advantage.
B) With effective property management, tenant difficulties should be non-existent or
reduced to a minimum.
9. What if I don’t have the time to manage my own investments?
Maintaining control of your investment does not mean active involvement. Once a property
has been purchased, an investor’s involvement can be reduced to a minimum through the use of
an effective property manager.
As mentioned in a previous question, the right kind of property management will save
the investor time, money and tenancy headaches.
Managers can assist in some or all of the following areas:
Maintenance, improvement, tenant screening, rent collection, lease preparation, advertising,
inspections and tenant relationships.
When selecting a professional manager, it is important to look for someone who is not only a
good people manager, but someone who runs the rental roll like he or she would run his or
her own business.
10. What if I don’t have enough money for a deposit?
Cash is not necessary as a deposit when there are sufficient assets to borrow against.
For example, the equity in an existing home can be used to finance the purchase of an
investment property and its associated costs.
Like to learn more?
Contact BAM to run a personalised simulation. We come to your home and show what can
be done.
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