Investment Advice & FAQ's
If I was to purchase an investment property for let say around $200k, Will I need to front up with any money for a deposit or some percentage of the actual price? If not, how come everyone isn’t doing this kind of thing??
The reason you don’t have to front up with a percentage is that you use a portion of your own home and borrow against it, where ever your home may be. The reason everyone isn’t getting into property investment is because not everyone has the equity to do it, and because a lot of people believe that you must have No mortgage before you can invest in property, where as in reality you can actually start a lot sooner because all you need to be able to do is loan $40k against your home to get started.
What is the average or optimum period of time an investor should keep a property before looking to sell it??
We actually believe that the wealth is built by buying and keeping the properties rather than buying and selling. As the equity in your first property grows, use it to purchase an additional property, (whilst keeping the first). The only time you’d really need to sell an investment property may be at retirement, and then only selling enough to pay of the mortgages of the other properties. There by leaving you with a number of debt free properties giving you an inflation adjustable income. Also you should be warned that if you were to buy and sell investment properties on a regular basis that the ATO would class you as a trader like on the stock market and then charge you capital gains tax for those properties, by keeping the majority you will be able to lessen your capital gains tax problems.
What types of properties do you recommend, and in what locations??
In general terms we tend to lean more to the Unit style then the House and Land style, and prefer the permanent let to the holiday letting style. On occasion we do get some holiday let properties but usually they are a mortgagee sale.
The house and lands that are currently on offer you should be wary of as the current demand for rentals is already being met by the supply of housing. We would rather see you invest in locations where there is a real pressure on the land availability, since this will influence the capital growth of the property.
We also believe in valuations. There have been a number of unscrupulous companies selling properties well above market values. We always advise caution.
If I purchased a property that I needed to rent out, are there property people who will look after the property?? Can you organize this??
Yes there are property managers, and yes we can arrange to put you in touch with some. There are also two options:
1. Use a real estate company as your property manager. Most will charge around 7 to 7.5% of the rent to take care of it.
2. In an area where there are a group of units there is usually a “Body Corporate” and a manager that usually owns one of the units. We like using this option when we select units as the manager has a vested interest in keeping the units in good nick and always rented.
I have had the offer of a free flight to the Gold Coast to look at investment properties. Do you offer the same??
No we don’t offer free inspection flights. Some companies do, however we believe that these companies are effectively “betting” that they will be able to sell you a property when you get there. They put you under extreme pressure whilst you are there and use hard sell tactics to do so.
What we prefer is a more relaxed, yet business approach. We allow you to make your own decision.
What we do offer is a chance to see our properties in S.E Qld at a reduced rate. We ask you to pay for part of the airfare and we then subsidies it, pay for accommodation and the airport transfers for you.
How much do I need to have in order to invest?? For example, I have seen that there are several units going up for around $180k. How much do I need up front in order to invest in one of these??
Provided you have the equity in your own home and, you can service the loan for the investment property, you can get started from as little as $1000 down. There may also be a weekly investment of $20 or more needed, depending on the property and the tax benefits you are entitled to.
I don’t own my home, I rent. Can I still become and investor and what will I need??
Yes you still can become an investor. What you will need is access to 20% deposit in order to do it; this may mean that you need to have up to $40k depending upon the value of the property you are looking at.
Gearing (also known as 'borrowing to invest' and 'leveraging') is the strategy of using borrowed money to purchase extra investments.
Borrowing to invest may not be a suitable strategy for you. While gearing has the potential to magnify gains, it will always magnify any losses suffered if the value of your investments falls. You may have to cope with potentially large fluctuations both up and down in the value of your investments.
Although it can lower your tax liability, the tax implications will depend on your personal situation and the type of investments you choose. Geared investments generally involve much higher risk than non geared investments and you should seek financial advice before borrowing money to invest.
The main benefit is that your investment balance is bigger. This means the potential dollar returns should also be bigger. But borrowing to invest is only worthwhile if your returns are greater than the interest you pay on the borrowings.
Another major reason to 'gear' an investment is that the cost of investing (including interest) may be tax deductible. However, there is a down side. If the investments you choose don't perform, the losses you make will also be magnified. Gearing is a sophisticated investment technique and is not suitable for everyone. We recommend you talk with a financial adviser.
| Benefits | Risks |
If your investments increase in value, gearing can magnify gains |
If your investments go down in value gearing will magnify losses |
It increases the amount you have to invest |
In the worst case, investors may lose their total investment and still have the loan remaining, which needs to be serviced |
May reduce tax as the costs of investing are generally deductible |
There may be interest penalties if the loan is repaid sooner than agreed |
You can achieve higher returns (after costs) than without gearing |
Returns must be higher than the interest costs for gearing to be of benefit. |
There are broadly three different ways you can borrow to invest
1. Margin Loans
Margin lending is usually associated with investing in the share market or managed funds. The shares or managed funds you invest in are used by the lender as security for the loan. A big consideration with margin lending is that you may be subject to a 'margin call' if the value of your investments goes down. This means you would either need to put in more money against the loan or sell some of the investments to pay back some of the loan.
2. Home Equity Gearing
If you are a homeowner you may be able to borrow against the equity in your home and then use the money to buy investments. The equity in your home is used as security for the loan, not the investments. You may find this less daunting and interest rates are usually lower than for a margin loan.
3. Geared share funds
Geared share funds are similar to ordinary managed funds, but they are 'internally' geared. Basically, the fund manager uses the assets the fund already owns as security for borrowing. The investor's liability is limited to the amount they invest, so there are no margin calls for investors.
