Evaluate the current market cycle of the city in which you want to invest

The real estate cycles of our major cities are rarely, if ever, synchronised. One city is at the peak of its cycle, another is rising from a period of flat or negative growth, others may be somewhere in the middle of its cycle, somewhere on the way up or down. The point at which you are buying can have a big impact on the performance of your investment, particularly in the short to middle term.

Study the regional and local demographics & statistics of your chosen suburb or shire

Population growth, economic growth, land availability, current & projected levels of construction, proposed urban development and/or improvements by local & state governments, rental vacancy rates etc. etc. etc., can have a big influence on future capital growth.

Determine the preferred mode of living by the owner occupiere

If the owner occupier in your selected region is way in favour of a free standing home, then don’t invest in a one bedroom unit on the 17th floor! Likewise, if owner-occupiers in the area are in favour of strata titled units or townhouses, don’t invest in a house. When you come to sell your investment it will be in conflict with the market. By following the owner-occupiers preference you will minimise vacancy rates and maximise the price when you come to sell, as your property will attract the wider market – the owner-occupier and the investor.

Never buy a property that has been designed and built solely to attract the investor

The ‘investor special’ will never appeal to the owner-occupier or the astute investor, leaving you in no-mans land when you come to sell (and, generally speaking, you will greatly increase your chance of unacceptable vacancy periods). Remember, if the property is not attractive to local owner-occupiers don’t buy it!

Establish the market value

Compare the asking price with similar properties for sale in the area and always have your lender organise an independent valuation

Assess the tax effectiveness of your chosen property

The wholesale construction cost and allowable fixtures & fittings allowance in particular, can vary considerably from property to property and can have a big effect on your after tax cash flow. You may be considering two or three properties that you have determined to be good value, with similar capital growth potential – all may even have a similar rental yield. One however, may well outshine the others in terms of reduced holding costs due to superior tax write offs and lower outgoings, dramatically increasing your real rate of return. There is no point determining these deductions after you have bought the property, it will be too late. Of course, tax advantages will only apply if you are an Australian tax payer.

Compile a financial analysis

‘Crunching the numbers’, allowing for a number of variables, is essential in determining the likely financial outcome of your proposed investment. It is extremely dangerous to invest in property without fully understanding the financial consequences. There is little point performing a detailed financial analysis after you have purchased a property. Know the facts and figures before you decide to purchase by computing all the ‘what ifs’ – allowing for varying interest rates, capital growth projections, vacancy rates etc. You will be going in blind unless you perform a rigorous financial analysis.

Leverage your way to wealth

By using the equity you have accumulated in other property (e.g. family home or another investment property) to fund the deposit on your investment property rather than using cash reserves, can have a positive impact on your real rate of return (the rate of return you will have achieved on the money expended to support the investment in regard to the capital growth. The interest paid on all the borrowings is claimable as a taxation deduction, maximising your real rate of return. As the value of your investment grows, you can then release the security on your family home (or other property) to fund another. If you currently don’t own a property, consider paying a cash deposit, later using future capital growth to fund a second property as above. See ‘Principles of Leverage’.

Decide on appropriate funding

The term of the loan, the interest rate, the ‘gearing’ level, whether fixed or variable, line of credit, split loans, interest only or principal & interest etc etc – all will impact on the financial performance of your investment and need to be examined in detail.

Open a separate account

Even if you have twenty investment properties, always have a separate account linked to the mortgage for each property. All income, outgoings and tax concessions are then directed to this account. You will not be confused by mixing money with your ‘grocery’ accounts – and your accountant will love you!

In who’s name and what percentage?

Your contract to purchase will allow you to nominate ‘Tenants in Common’ and give you the option to vary the percentage of ownership between you and your partner (or other individual). This can have a significant affect on tax concessions. There may be little value in having a 50/50 ownership with a partner if one is paying a top marginal tax rate of 48.5% and the other 31.5%. Maximum tax advantage may occur if the ownership in this case was split 70/30. Allow for these variables in your financial analysis and you will optimise your investment for maximum return! (check with your accountant and/or solicitor before making a final decision).

In who’s name and what percentage?

Your contract to purchase will allow you to nominate ‘Tenants in Common’ and give you the option to vary the percentage of ownership between you and your partner (or other individual). This can have a significant affect on tax concessions. There may be little value in having a 50/50 ownership with a partner if one is paying a top marginal tax rate of 48.5% and the other 31.5%. Maximum tax advantage may occur if the ownership in this case was split 70/30. Allow for these variables in your financial analysis and you will optimise your investment for maximum return! (check with your accountant and/or solicitor before making a final decision).

Apply to have your taxation instalments varied

The Australian Taxation Office will allow you to vary your taxation instalments to reflect your new tax position after buying your property investment. For example, if the property provides you with a $6,000 tax rebate in the first year, you can apply to the ATO to have your taxation payments levied against your current taxable income reduced by $115 per week. This way, you have the money available to help fund the property immediately rather than wait 12 months or more to receive your refund. Again, check with your accountant.

Select a competent property manager

An efficient property management company can make the difference between a smooth, trouble free investment and an ‘always a problem’ experience. Good property managers will advertise your property promptly, advise you on correct market rental, screen potential tenants, examine past rental references, conduct regular property inspections, pay rates and insurances on your behalf and nip any potential problems in the bud – and their fees are a taxation deduction. APM can assist in locating one for you.

Australian Property Masters are specialists at assisting clients to maximise returns while minimising risk through astute property investment.