What property investors must know before buying a property

Getting into property investment can seem daunting with all the unfamiliar lingo. We’ve broken down the 4 key phrases you need to know when buying an investment property. Owning an investment property is similar to running a business, with income, expenses, and tasks to manage, aiming for ongoing income or capital gain. Just like a business, specific metrics relate to your investment property’s bottom line.

With that in mind, here are four financial terms every property investor should know…

Rental yield

Rental yield is the difference between the income you derive from your rental property versus the costs involved in owning and managing it. It’s a figure commonly used by property investors to determine whether the property will serve the financial purpose they hope for. When it comes to calculating rental yield, there are two different ways: gross yield and net yield. Gross yield simply looks at the gross rental income you receive in one year versus the property’s market value. Net yield is a more accurate figure that gauges the annual rental income against all outgoings, including mortgage, insurance, rates, maintenance, and property management fees. As for what is a good rental yield, there’s no clear-cut answer and it really depends on your personal investment strategy.

Gearing

Rental yield brings us to another commonly used term that’s discussed in regard to investment properties; gearing. Rental properties can be positively or negatively geared.  If your rental property makes an income after all expenses, it is positively geared. If it makes a loss, after all expenses it is considered negatively geared. This negative gearing then creates a taxable loss, which can potentially be offset against other income, such as your salary, to provide tax savings.

You can negatively gear a property and still have positive cash flow. This is the case with high yielding properties such as, NDIS, Dual-Occupancy and Co-Living where rental income is maximised.

Capital gain or loss

If your investment property increases in value and covers all your costs when it comes time to sell, it enjoys a capital gain, and that’s something many of us hope for when we purchase a property. On the flipside, if your property sells for less than it has cost you, then that’s considered a capital loss. And both scenarios have tax implications. As the ATO explains:

‘A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it. If you make a: net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT) net capital loss, you can carry it forward and deduct it from your capital gains in later years.’

Capital gain and loss is quite nuanced, so it pays to consult your accountant or financial advisor.

Depreciating assets

Depreciating assets allows you to claim back the cost of purchasing an item for your rental property over several years. And again, this is fairly nuanced, with the ATO noting the item in question cannot be part of the structure of the property.

The ATO goes on to explain:

‘Depreciating assets have an effective useful life and are reasonably expected to decline in value over time. For depreciating assets costing more than $300, you can claim deductions for the decline in value over its effective useful life. Examples of such assets in your rental property or holiday home include floating timber flooring, carpets, curtains, appliances like a washing machine or fridge, furniture.’

The bottom line

There is a raft of financial implications to consider when it comes to purchasing and owning an investment property. This is why it pays to consult a good property investment advisor who will assist in referring you to the right professionals. Each year, you will also need to provide information for your investment property as part of your annual tax return, so it’s important to keep records of all incomings and outgoings associated with the property.

How we can help

Our experienced property investment advisors pride themselves on establishing great relationships with novice and experienced property investors alike. We manage every property investment portfolio as if it were our own and you can learn more about our advisory services by emailing us at info@mercercooper.com.au.

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