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Investment properties: not just for the rich and famous

 

According to the Australian Taxation Office, one in seven Australians owns an investment property. A common perception is that you need to be rich to own an investment property, but in fact more than two thirds of all investment properties held by Australians are done so by people earning less than $80,000 a year! [source: ATO April 2011]

 

Simply put, the average Australian is ‘saving’ for his/her retirement by buying property. The combination of rental income, potential capital growth, improved future borrowing, not to mention tax benefits, is luring the average Australian to purchase investment property.

 

Around 66 per cent* of all investment properties in Australia are negatively geared (where the income from the property is less than your expenses). And over time, the negatively geared component will become smaller – plus, if you’ve bought an investment property in the right location at the right price, the value of the property would likely have increased in value, meaning a great long term investment strategy.

 

There continues to be strong demand for rental properties in many parts of Australia. According to the Australian Bureau of Statistics, renters’ households in this country represent 29 per cent of total households.

 

With residential vacancy rates in many parts of Australia still at near or historical lows, it means demand in certain areas is outweighing supply – and that is putting pressure on rents. A report from real estate group RUN Property showed that in the 12 months from January 2011 to January 2012, rents in Australia’s most sought-after suburbs increased by up to 13 per cent. For example, 24 suburbs in Sydney and 18 in Melbourne saw rent increases of more than six per cent in January 2012 compared with the same time last year. Fairfield in Melbourne had the highest leap in rental prices (13.4 per cent), followed by Edgecliff in Sydney’s eastern suburbs (12.6 per cent). These were closely followed by hikes of 11.7 per cent in the Sydney north shore suburb of Cremorne and 11.5 per cent in Surry Hills in inner Sydney.

 

The popular suburbs close to beaches, major shopping centres or train stations continued to go from strength to strength for investment property, RUN said.

Key considerations

It’s important to do your research when buying an investment property. Some of the key considerations include:

  • Choose a property that will be attractive to tenants
    The property should be clean, have good-sized bedrooms, in a good location away from main roads, and ideally feature off-street parking.
  • Consider the nearby infrastructure and amenities
    A property that’s close to the CBD, beaches, schools, public transport and leisure facilities is more likely to grow by more than the average in a good market and to hold its value in a subdued market.
  • Check out price history
    Look at how rents and property values in the area have been performing over the years.
  • Engage the professionals
    Using a professional property manager is important to ensure you get reliable tenants and that they pay a good market rent. Again, do your research when looking for a property manager: ask what services they provide, how often they inspect a property, how many properties they’re currently handling.
  • Buy a ‘blue chip’ property
    It’s often worth paying market value for a good property in a good suburb than jumping in and securing a cheap property (it’s probably cheap for a reason!)
  • Enhance your property
    If you do some easy renovations such as repainting, laying new carpet, installing new curtains or blinds or installing new benchtops or cupboards in the kitchen, this could be easily repaid in higher rents and/or capital growth.

 

Room for improvement

So, you’ve purchased an investment property and want to make your asset work for you? It might be worth considering doing some quick and easy upgrades which could increase the rental value. But don’t jump in head first; think carefully about what to do, because these upgrades could take years (if ever) to become worthwhile.

And rather than spend a mozza, it’s possible you only need to undertake some minimal but cost effective works.

For example, consider making a property more energy efficient. With the carbon tax now in force, it means utility costs will go up, thus making properties more expensive to maintain. Some simple measures include:

  • Having good insulation to help reduce power bills
  • In cooler regions, keep warmth in by sealing up gaps and using blinds or curtains to stop the heat escaping through windows
  • In warmer areas shade windows to keep out the heat and reduce exorbitant electricity costs due to higher air conditioning use
  • Install more energy efficient appliances

 

If you’re looking to renovate kitchens or bathrooms to revamp the property in order to attract higher paying tenants, you might not need to pull out the existing kitchen / bathroom. It might just be a matter of installing new benchtops, replacing appliances, putting in new tapware, installing a new toilet seat, polishing floorboards or laying new tiles, or giving interiors a coat of paint.

There are a number of other tips to enhance the appeal of your rental property:

  • Painting: New paint in fresh light colours can show off a property to its maximum advantage.
  • Flyscreens: Are the flyscreens in poor condition? Replace them with quality mesh that won’t deteriorate easily. If the property is close to the sea, choose plastic mesh rather than metal to avoid salt air corrosion.
  • Floor coverings: High quality floor coverings enhance the appeal of a property, whether it be well maintained floorboards or scent free carpets.
  • Window fixtures: Good quality curtains or blinds provide privacy and security for tenants.
  • In the kitchen, fix drawers so they slide easily, and make sure handles are screwed on tight. Ensure plumbing is working well.
  • A modern, well ventilated bathroom with attractive bathroom fittings will attract a higher rental and, in the longer term, mean fewer maintenance problems associated with moisture, leaks and usage.
  • Gardens / exteriors: Well maintained gardens and exterior living spaces can go a long way to attracting quality tenants. Lay some bark chips in garden beds to provide colour; plant easy to maintain shrubs or pot plants; ensure balconies / terraces are clean and in good order.

Tax and renovations

Now we’re into the new financial year, it’s obviously important to understand what expenses you can claim. It’s also important to understand what are deemed renovations and what are classed as repairs. It’s best to check with the Taxation Office or your accountant, but here’s an overview:

 

Keep in mind that there are three components to a depreciation schedule:

  1. Capital works depreciation: based on the original construction cost
  2. Depreciation on plant and equipment: where items such as carpets, blinds, ovens (and more) can be depreciated at accelerated rates
  3. Renovations and improvements: this allows for capital improvements done to the property

 

According to the ATO website, among the things you can claim straight away are:
Interest on a loan to:

  • Purchase a depreciating asset for the property, such as an air conditioner
    • Finance renovations like a deck
    • Make maintenance repairs or repair damage to the property
  • Repairs to part of the guttering or windows damaged in a storm
  • Maintaining plumbing, repairing electrical appliances or machinery
  • The cost of preparing a lease agreement with your tenant

 

And what you can claim over a number of years:

  • The cost of depreciating assets, structural improvements and most borrowing costs
  • Assets that are part of the property, such as stoves, air conditioning and hot water systems, which can be claimed over a number of years as a ‘decline in value’ deduction
  • Capital works deduction (normally over 40 years) for the building construction plus any subsequent improvements made by you or a previous owner
  • The total cost of ‘improvements’ to your rental property
  • Replacing something such as a complete fence or building, a stove, kitchen cupboards or a refrigerator

 

The ATO website www.ato.gov.au/rental has detailed fact sheets outlining what you can and cannot claim for your rental property.

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Lisa Llewellyn

Lisa started her working life as a property and financial journalist, working for media outlets including BRW, Radio 3AW and Australian Investment magazine. She turned her hand to PR and opened a boutique PR consultancy in 2001.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.