When you purchase a property for investment purposes, you are looking to earn a return on the investment, either through rental income, the future resale or both.
The goal of any investment plan is to create a passive income. Rental income is an example of passive income and has proved itself as a safe and secure way to increase wealth and achieve financial freedom.
Investing for future resale means that you will look for an area that has a high demand to supply ratio at the time you’re ready to buy. You will want to see a history of capital growth in the area, thus creating equity which can be used to purchase another investment property.
It’s important to note that the way in which an investment property is used has a significant impact on its value. For example, if an investment property has potential for both commercial and residential use, the pros and cons would be weighted up to determine which option would deliver the highest rate of return.
Financing an investment property is slightly different than for a typical home loan. An investment loan is a mortgage solution to buy a property and rent it out to receive income from it, when you can’t necessarily afford to buy the property without a loan.
There are stricter eligibility requirements associated with investment loans, for example you may need to have a larger deposit or access to existing equity, plus traditionally they also have a slightly higher interest rate on average than residential home loans do.
One of the many benefits of property investment is that you can claim tax deductions from expenses generated through the investment. This will reduce your taxable rental income and your capital gains tax if you sell the property.
Tax deductions you can claim for an investment property include:
- Interest on the investment loan.
- Home and contents insurance and landlord insurance.
- Real estate agent’s commission.
- Maintenance costs.
- Council rates.
- Decline in value of depreciating assets.
- Construction costs (“capital works”).
- Travel expenses to the property to do an inspection, maintenance or repairs.
You may be wondering when the right time is to invest in property, what is the best age? In short, if you have a steady income then you can invest in property. In fact recent statistics, from the Reserve Bank of Australia, show that property investment is becoming increasingly popular with young people as a way of getting into the property market.
30% of property investors are under 40 years old, and another 60% are under 50 years old and about half of all property investors have a household income under $100,000.
There are however restrictions regarding who can purchase investment property in Australia.
For instance, Australian citizens are not restricted to the number of investment properties they can purchase, regardless of whether the property is established, a new dwelling or vacant land with intention to build on. Australian residents who are not Australian citizens can purchase one established property to live in, plus new property or vacant land as investment.
When it comes to non-Australian residents, off-the-plan properties and vacant land to build are the only investment property options available. They are not able to purchase established residential property for investment purposes.