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Property Investment

Why Invest in Property

Tax Benefits

• No stamp duty, no wealth or death duty, no estate taxes, no capital gains tax.

•  Interest rates incurred on money borrowed for financing rental property is a deductible expense. There is no limit on the amount of interest deductibility that can be set off from one investment to another.

•  Legal fees such as arranging a mortgage and drawing up a tenancy agreement are deductible expenses. Rates and insurance on rental investment property are deductible.

•  The cost of repairs on rental investment property, management fees to collect the rent and maintain the property, commissions paid to an agent to find tenants and accounting fees incurred on preparing accounts are all deductible.

Rental Income

•  Rental income is the money your tenant pays you to live in your investment property. One of the benefits of property investment is that your tenant in effect contributes or pays your mortgage for you. If your financing costs and other investment property-related expenses are greater than your rental income, you may find yourself in a negative gearing. While this has risks, it can also have advantages.

Negative gearing is the potential tax advantage of residential property investment.

It refers to the period, generally during the initial years of owning the property, when your property investment makes a loss because your expenses and outgoings (such as interest repayments on your home loan) are higher than the rental income. These losses can be used to offset your income tax. Generally, you pay more interest during the initial years of a standard principal and interest-reducing home loan. Once you start making headway on repaying the principal, you pay less interest.

An interest-only loan increases the tax-deductible expenses associated with residential investment property over time because you're not repaying any principal. So an interest-only residential investment loan may be a good choice when following a negative gearing strategy. Talk to your mortgage broker.

Potential Capital Gains

Capital gains are the second form of income from your property investment.

You achieve capital gains when the value of your investment property increases, compared with its original purchase value. This is why it's important to try to buy investment properties below their market value if possible, or purchase a property in an area where house prices will increase.

Returns from capital gains depend on movements in the housing market and may take longer to achieve than rental income returns. Keep in mind that while property values tend to increase over time, they can go down as well as up. You should also consider the increase in your investment property's value in relation to the time you've owned the property and your original investment in it.

As an investor, you may aim to buy investment properties that can provide both types of investment return. Different investment properties will provide different levels of capital gain and rental income.

Rental Income Return

•  Calculating the returns from rental income can help you compare different investment properties. Two common measures are:

Gross rental yield: This is the rental income received relative to the value of your investment property. It can be a useful way of comparing the return from different investment properties, or comparing your actual investment results with your goals. To calculate gross rental yield, divide the annual income from the property by the purchase price and multiply by 100 to get the percentage rate of return (yield).

Rental return on investment: The rental income received relative to your equity or investment in the property. It's important to factor in the costs associated with the borrowing maintaining and managing it.

To calculate rental return on investment, work out the rental income per year and subtract total expenses associated with the rental property for the year (include mortgage repayments, insurance, rates, maintenance etc). This will be the net operating income which when divided by the total amount invested (equity or investment in the property including the cost of any improvements made) and multiplied by 100 will calculate the rental return on investment.