Investing in property

Making the right choice for you will involve research and understanding some fundamentals.

You should follow the tips outlined in buying a home and remember that you are buying an investment, not a home to live in. Emotion should play no part in your decision.

If you buy the right property at the right price, you may experience capital growth and good returns. However, the reverse is also true. While every property is different, the following are some things to consider:

• The basics of supply and demand rule any market, including property. If there’s a flood of similar properties on the market, prices will generally fall.
• If buying a residential property, buy it close to schools, shops and public transport and in a suburb which is vibrant and safe.
• Residential investments tend to experience greater growth than commercial properties. (That said, the reverse could be true if you buy the right commercial property and the wrong residential property).
• Land appreciates while buildings depreciate.
• If you are renovating to improve the value of the property, be careful not to over-capitalise and spend more on the property than you can hope to recoup when you sell.
• Capital gains tax is charged on investment properties purchased post-1985.
• The yield is an important consideration. (The yield is the net annual return on the investment in rent minus expenses, as opposed to the capital growth).
• Don't forget to factor in the costs of buying and selling property such as stamp duty, agents’ fees, and land tax.

There are responsibilities to being a landlord, but then maintaining the property in good order is in your interest. Properties left in poor condition usually return smaller rents, may not attract good tenants and in the long run are more difficult to sell at a premium price. While the legislation governing rental properties can vary between each state and territory, these are some of the basics you may be required to do:

• Provide the tenant with a copy of the lease agreement. (You may be able to buy a residential tenancy agreement from your newsagent; if not, call the relevant government department in your state or territory).
• Provide the tenant with a report on the condition of the property at the start of the lease.
• Lodge the bond with the rental bond board or an approved financial institution.
• Pay for all rates, along with water and sewage charges.
• Ensure the property is safe, secure and fit to live in.
• Issue receipts for rental payment.
• Respect the privacy of the tenant.

While you have the right to regular inspections of your property, these must be done with respect to the privacy of the tenant and in accordance with the legislation. Generally you will need to make an appointment and there is a limit to the number of inspections you can make in any 12 month period.

In return, the tenants have a number of responsibilities, which include:

• paying the rent on time
• not subletting the premises without your permission
• not keeping pets without your permission
• not altering the property without your permission
• informing you of any repairs that are needed.

Gearing is borrowing to invest. Negative gearing is generally when the costs of holding the investment outweigh the ongoing return.

For example: You have an investment property with tenants paying $500 per week ($26,000 a year), but your repayments on the home loan and other costs such as rates, maintenance and agents fees are $36,000 a year. So you are making a loss of $10,000. However, the costs associated with maintaining an investment property are often tax deductible. This means you may be able to claim a tax deduction for these costs incurred.

Another reason why people are prepared to make this loss is in the hope that the property itself will appreciate and, in time, they will sell and make a capital gain (less any capital gains tax which may apply).

You can also negatively gear other investments such as a share portfolio. However, you should never invest on the basis of a tax advantage alone. The investment itself must be sound.

In general, you may pay a higher interest rate for investment loans than a residential home loan. However, depending on your circumstances, this may not be the case.

You may be able to access the equity in your existing property to fund the investment. Or you could simply use your home as security for the investment.

If you choose to roll the two loans (home and investment) into one, you should make sure it doesn't negatively impact your interest rate or your tax position. Make sure you still have the flexibility you need to make the loan repayments and live your life.

Depending on your circumstances, you may decide to choose between an interest only, interest plus principle, fixed or variable rate loan.

At ANZ, we understand that every investor’s circumstances differ, from those investing in residential property for the first time, to experienced investors seeking to extend their established portfolio. We can help guide you through the process of achieving your investment goals.

• Home loans at a glance is a great spot to find out more about the investment loans available to you.
• ANZ Home and Investment Loans: an ANZ Home Loan specialist can help you explore your options and find the right solution to suit your needs. And remember, ANZ is Australia’s most awarded home lender¹. Contact us today.
• ANZ Home Insurance: help protect your property with ANZ Home Insurance, which guarantees full building replacement and covers you in the event of flood, fire, wind, rain and cyclone if your claim is accepted².  If you plan to rent the property you could also consider ANZ Landlord Insurance.
• An ANZ Financial Planner could help you establish the right balance between investing in the property asset class and the rest of your wealth creation strategy. 
• Make an appointment with an ANZ Financial Planner.