Property investment has made more people wealthy than shares, claims the Australian Investors Association. And for this reason, more people than ever are watching the property climate across Australia in anticipation of entering the market. If you want to get in on the action, Acumen Finance can help. They have the resources to connect lenders and borrowers to complete transactions with flexibility and speed.
If you think you are ready to jump into the market, there are some things you should know before you cast hook, line, and sinker into the tide.
What’s really cool when you stop to think about it is the simple fact that, with property investment, you are investing with someone else’s money. Whether it’s through a brick-and-mortar bank or private lending, the loan you secure helps you grow your money faster. Obviously, you have an obligation to repay that, but a loan today allows you to invest in your tomorrow.
- In an ideal world, an investor (you) would find a suitable property in a nice neighbourhood with all the best amenities: schools, retail conveniences, community. A nice family would come along and rent your property and pay enough in rent to cover all your expenses: mortgage plus interest, taxes, and maintenance generating a positive cash flow. In this scenario, the renters are essentially buying the property for you while you sit back and accumulate equity - what’s not to love? This is called positive gearing, and we’ll cover this and negative gearing in more detail in another post.
- Residential properties are a pretty stable investment. They tend to be less volatile and are not influenced by daily price fluctuations, like the stock market where prices can change - sometimes radically - day to day. So, it’s easier (read: less stressful) to buy and hold than other types of investments.
By nature, residential properties are typically long-term investments (more than 12 months). Therefore, the chances are on your side that values will increase. Some experts say that Australian property values double every seven to 10 years. Also, the demand for housing in Australia is higher than supply - buyer activity further drives up values. So if you’re in it for the long-term, it’s a safe bet your investment will perform well - but, as with any investment, there are no guarantees.
- Ownership buys you leverage: Essentially, when purchasing a property, you can buy more “value” with less money. As we mentioned above, when you secure a loan to purchase property, you are investing someone else’s money (banks, lenders, etc.) to create Capital Growth. Here’s an example:
Let’s say you purchase a house for $500,000. You put down 20% ($100,000), and the lender holds a note for the balance of $400,000. Let’s also say that when you decide to sell, the value of the home has increased by 10%. Your return on investment (ROI) is $50,000 (500,000 x 10% = $550,000) minus the loan and downpayment) plus any accumulated principal paid on the loan. That same investment with the same 10% ROI in shares would return only $10,000.
Also, the property itself can be used as leverage to secure more loans - particularly if it is positively geared (making money), or you have sufficient equity.
- You reap the Tax Benefits: Purchasing a property for investment is typically a long-term position - i.e., you will keep the property for more than 12 months. Australian tax laws provide a 50% capital gains discount on long-term investments. So, even if you realised a $50,000 gain (using our example above), your capital gains liability would be for only one-half of the total gain.
At the top marginal tax rate of 47%, the discount effectively reduces the rate to 23.5%. Don’t be stymied by the numbers. It’s the bottom line that should have your attention. (NOTE: the capital gains discount does not apply to non-residents or temporary residents.)
Further, if you live in the property, there is a full capital gains exemption, meaning there is no capital gains liability when you sell your primary home. So, even if you’re not ready to enter the property market as a means to generate cash flow, it’s still a good, solid investment.
The interest you pay on investment home loans is tax-deductible. That’s right; your interest deduction can be used to offset your income and capital gains tax liabilities.
Other tax benefits can be derived if the property is negatively geared - a significant consideration for those who need tax offsets.
As you can see, the positives of residential property investment are quite enticing. We would be remiss, however, if we didn’t discuss the cons, too:
For the majority of investors, financing is an inevitable conclusion. Funding, like real estate itself, can come in many different forms. The most obvious are bank loans, but there are options. Credit Unions and Building Societies (tier 2 lenders) have products that have helped many investors enter the market. Their rates are generally a bit higher than traditional banks, but they have more flexibility in their lending criteria and tend to be a bit quicker in the approval process.
But if it’s flexibility, speed, and a little bit of creative thinking you require, Private/P2P Lending offers the most, and it’s often the quickest solution. Once a very exclusive market, private lending is disrupting mainstream lending, opening the market to the average citizen. Regardless of your needs, Acumen Finance can connect you to the appropriate financing product. They are a trusted and reputable P2P Lending agent, with access to a conglomerate of savvy, high net-worth individuals and companies; they know the banking system, the players, and who is lending and their criteria. Using sophisticated loan calculators and financial modelling expertise, Acumen can tackle transactions with tricky timing and technical constraints. Contact Acumen Finance to see how they can help you get started with a residential real estate investment.