We have recently had many accounting enquiries from people wanting to invest in the property market.
When looking at purchasing property and doing the numbers, we’ve noticed some common items people fail to consider when looking at return on investment of the potential investment in property.
1. The Entry Costs
The costs to acquire a property are significant, so it’s important that you assess this as part of the overall decision to buy. Many people only look at the purchase price and fail to consider the huge cost of the following which can add tens of thousands of dollars onto the price:
- Stamp Duty
- Legal Fees
- Building Inspection
- Pest Inspection
2. Lender’s Mortgage Insurance
Lender’s Mortgage Insurance is not to protect you as the borrower, but is to protect the lender if you default on your mortgage. Often it is added to the total amount borrowed.
It is common for investors to use equity in their family home as a deposit to acquire an investment property, however, if you are borrowing more than 80% of the house’s value and don’t have enough equity in your home (or in the form of a cash deposit) you will need to pay Lender’s Mortgage Insurance.
Investors often fail to take into account this cost as part of the overall return on investment, and it can be significant in some instances.
3. Capital Works Deductions increase your Capital Gain
Claiming capital works (building write-off) as a tax deduction against rental income is an effective way to obtain a taxation benefit throughout the property ownership period.
What many people don’t know is that when it comes time to sell the property the capital works deductions claimed will reduce the cost base of the asset which means you will have a larger capital gain upon sale.
4. Buying a Property for the Tax Benefit
People often talk about the benefits of negative gearing as a strategy to reduce tax. Negative gearing is where the property costs exceed the rental income received each year and you claim the rental loss against other taxable income.
What is often not considered is that for every $1 loss on the property you are only saving on average 30 cents in tax (this varies depending on your marginal tax rate). This strategy leaves you out of pocket by approx. 70 cents in every dollar.
You need to make sure that your property capital growth is at a higher rate or you are losing out overall.