Tax, Timing and Red Tape

Guest post by Laura Costello

What You Need to Know About Buying Investment Properties in Australia


Buying an investment property is one of Australia’s popular long-term forms of investment.

However, many people become overwhelmed by the process, or are left scrambling to finance the purchase and on-going management of their investment property.

Where and what you buy will affect your return on investment, as will maintenance costs and taxes.

Here is what you need to know before buying an investment property, including some tips to help you identify a good investment property and popular financial strategies to help you receive the most from your returns.

Financing an investment property

House and land packages offer an affordable home loan solution, allowing you to bundle the financing loans for the house and land.

One of the main benefits from the package approach is that the construction loan allows you to ‘draw down’ on an agreed amount to pay during each stage of the building process.

This means that you only pay interest on the specific money you are using during each stage that the home is built.

It also means that you do not have to pay stamp duty, as it only applies to established homes.

Leveraging equity in your home, or equity from another property investment, can be another effective way to buy an investment property.

Most lenders and mortgage insurers have valuable data on different locations and property developments.

Accessing this information can assist you in choosing the right loan and investment property for your financial situation.

Property is a long-term investment

Investing in property is a popular and proven path to long-term wealth.

However, as it is a long-term investment, you should not and cannot rely on the property price and yield rising straight away.

The financial benefits of an investment property increase the longer you can afford to commit to the property.

Therefore, it is important to make sure that you can maintain your mortgage repayments over the long term.

It is also important to note that, unlike shares or other investments, you cannot sell part of an investment property if you need money.

As a long-term investment, it is crucial to also be aware of other taxes involved in property investing.

These taxes include Capital Gains Tax, Land Tax and Stamp Duty which may all change over time.

Where to buy

Buying in a familiar market will ensure less time required in researching the area.

Look for areas where high growth is expected and check recent sale prices in the area, so you get an idea of what you can expect to pay.

When considering where to purchase your investment property, it is also important to research the rental yield of similar properties in the area.

Your study and research about vacancy rates will indicate whether the property is in a desirable area that will make it easy to rent the property out, or sell it in the future.

Finally, when considering the area in which to purchase the property, it is also vital to find out about any proposed changes which may affect future property prices includngi factors such as zoning changes or major new developments.

What to buy

There is many things to consider before buying an investment property, choosing a property type is one of the earliest and most important decisions you will make.

  • There are numerous benefits and disadvantages for different property types.
    Units can be easier to maintain than houses, but you will have to pay costly body corporate fees. It is also important to consider the cost of maintaining the property.
  • Older houses can be cheaper to purchase, maintenance costs may result in spending more than you originally intended.

Similarly, while pools and extensive landscaping are attractive features, it is important to consider the maintenance costs involved.

It is advisable to engage a professional building inspector before you purchase an investment property which will allow you to find any potential problems and expenses associated with the purchase.

Features that will make your investment property appealing to as many people as possible, include proximity to nearby schools, shops and transport.

It is important to find a property that will attract all segments of the rental market; such as singles, couples and young families which will ensure that you keep your vacancy rates low.

Negtive gearing

Negative gearing has been a popular strategy for Australian investors for many years.

It occurs when the costs of taking out and maintaining an investment are greater than the income you receive from it. You can then use your investment loss to offset the other income you earn, allowing you to pay less tax.

This means that as a whole you will be required to pay less tax to the Australian Taxation Office (ATO).

The investment expenses that you can claim as a tax deduction are generally expenses associated with the management and the maintenance of the property.

The three main categories that you can claim deductions on are:

  • Revenue deductions (interest on money you borrowed)
  • Capital items (large items such as dishwashers) and;
  • Building allowances (depreciation over time for building works).

Seek advice from a tax accountant in order to determine which expenses you may be eligible to claim.
Investing in property is one of Australia’s favourite ways to invest.

As with other types of investments, it’s important to do your research and seek professional advice.

Speaking to an experienced financial advisor and attaining the services of a property manager, are vital to ensuring the success of your investment.

Bio: Laura Costello is in her final year of a Bachelor of Law/International Relations at Latrobe University. She is passionate about the law, the power of social media, and the ability to translate her knowledge of both common and complex topics to readers across a variety of mediums, in a way that is easy to understand.