The recent depreciation changes have the greatest impact on the types of property you may choose to invest in. Some people prefer to invest in brand-new properties, while others opt for older property that they can renovate and resell for profit. So, which is the better investment strategy? Let’s look at this in actual finite details. If you look at Table 5.1 below, you’ll see the net effect of the cost of owning a property broken down into three examples:
a brand-new property;
a property built between 1987 and 2016; and
a property built before 1987.
At the time of writing this book in 2017, the middle column is 2016 because it’s one year prior to the current year. This highlights that the property is second-hand and you will be acquiring previously used assets if you purchase it now. If you’re reading this in 2019, the middle column will be 1987 to 2018; one year less than the current year.
Depreciation on three types of residential investment property
The assumptions are the same for every property: each one will generate a weekly rental income of $700 over a 52-week period, which works out at $36,000 per property. Furthermore, the interest rate is 5.5 per cent on each property on borrowings of 80 per cent of the purchase price – that’s an annual interest bill of $33,000 which is the same to illustrate the net effect on depreciation. Each property will have other expenses at 1.5 per cent of the purchase price, which makes $11,250 annually for each property. Now, you could argue that property built before 1987 could have higher expenses, but for ease of comparison we’ve kept the same rate. So, it’s the same scenario for each property with the net outlay before depreciation of $7,850. Now, here’s where things get interesting, what about the depreciation?
In a brand-new property, the depreciation in year one is $15,000;
For the property built between 1987 and 2016, it’s $4,000 because all you claim there is the structure of the building; and
For a property built before 1987, the depreciation is $0.
Depreciation on a brand-new property
You can see that the total tax loss on the brand-new property is quite high at $22,850. If you are an investor who is paying tax at a marginal tax rate of 37.5 per cent and you’re making a loss of $22,850, you will receive a tax cheque back from the ATO to the tune of $8,455 – and that’s cash in hand. However, you have physically paid out $7,850, remember? You’ve been paying $605 a year to own that property – so the net return is $12 a week positive cash flow.
Depreciation on an old property
Next, let’s look at the property built before 1987. Again, you have physically paid out $7,850 over the year to hold the property. You can’t claim any depreciation on your investment, so the total tax loss continues to be $7,850. If you are in the 37 per cent income tax bracket, there will be a tax return of $2,905. Given that $7,850 has been paid out and there’s a tax cheque of $2,905, it’s cost you roughly $5,000 per year to own. That’s just under $100 per week to own a property built before 1987.
Depreciation on a second-hand property built between 1987 and 2017
Using the same variables, if you bought a property built between 1987 and 2017, your annual tax loss would be $11,850, so you would receive a tax refund of $4,385 (providing you are in the 37 per cent bracket). Your cash outlay was $7,850, so your annual cash outlay is $3,465. That means your weekly cash flow is negative $66, but you’ll still eventually realise a capital gain over the medium to long term. As you can see, there are pros and cons of buying brand-new and almost-new properties, depending on your investment strategy. Furthermore, buying brand-new property often carries the developer’s profit, which you pay for in the purchase price. If you buy something ‘newish’ – say a five to ten-year-old property – there is a fair chance that it has been bought and resold a few times. Therefore the value is now reflected in a more realistic way on the open market.
Property depreciation is a legal tax deduction related to the ‘wear and tear’ of an investment property over time. A tax depreciation schedule outlines the deductions you may be entitled to claim each year of ownership on the Building Allowance (the structure itself including bricks, concrete, etc.) and, if eligible, on the Plant and Equipment items (internal items like ovens, carpets, blinds, etc).
As with any tax deduction, claiming property depreciation reduces your taxable income. That means more money in your pocket to reinvest or to spend on yourself or on your family.
A depreciation schedule from Washington Brown is a fully-comprehensive, ATO-compliant report that helps you pay less in tax. The amount the depreciation schedule says you can claim effectively reduces your taxable income because it’s taking into account how much it costs you to own and maintain the property.
While you may be used to claiming on such items as council rates or property management fees where you have paid money towards an item or service, depreciation is a “non-cash deduction.” This is because it’s the ONLY deduction that you don’t have to pay for on an ongoing basis – its already ‘built’ into the purchase price of the property.
If you’ve purchased an investment property, request a free quote for a fully comprehensive, ATO-compliant depreciation schedule today and save.
Let’s talk about bricks and mortar. Or what the Government calls the Building Allowance.
Whilst you can no longer claim depreciation on plant and equipment in second-hand investment properties, that’s the things like ovens, dishwasher etc.
You can still claim the structure of the building, that’s the bricks, concrete, windows, tiling, etc. provided the residential property was built after 1987.
And these costs typically represent about 85% of the construction cost of the property.
And that’s good news, but I want to turn it into great news!
Up until now, when you ordered a depreciation report, quantity surveyors give you a lump sum total for your building allowance, based on the government’s guidelines that these items last approximately 40 years.
But in our experience, that’s not true.
Investors tend to update things like kitchens and bathrooms every 20 years.
So Washington Brown has come up with the Building Allowance Maximiser report, and it’s the only one of its kind.
What it does, it splits the building allowance into different categories, based upon our research of what items wear and tear more quickly.
Which means, if you use our report, when you replace those items or update them, you’ll be able to claim the full amount as an immediate tax deduction.
Let’s say I bought a property 20 years ago, with a kitchen that cost $10,000 to build.
Now, because it’s halfway through its 40-year life, I’ve only claimed 50% of its depreciation, which is $5000.
When I remove it today, using Washington Brown’s new report, I’ll be able to claim the remaining 50% as an immediate tax deduction.
Cashflow can become a major problem with your property investment. For beginners, slow cashflow could prevent you from building your portfolio as quickly as you’d like. Happily, there are some tricks you can use to make improvements to your investment property cashflow.
So, you’ve got what you think is a great investment property. You’ve followed all the property investment basics, but your cashflow is tighter than you expected. At times, it can be a real struggle to pull together the money to pay for the property’s expenses.
This is a common problem, no matter how well you’ve followed investment property tips. Beginners, in particular, tend to struggle with getting their cashflow up to the level they’d hoped for.
All is not lost. There are a few tips you can follow to improve your investment property cashflow.
Tip #1 – Raise the Rent
It may seem like a simple tip, but it’s one that many beginners don’t think about when they’re dealing with cashflow issues. Raising the rent on your property can offer a short-term solution while you look at the bigger problems.
Of course, you can’t do this every time you face a cashflow issue. Constant rent increases will drive your tenants away. However, it becomes an option if you haven’t re-examined your rents for some time. In such cases, you may be charging less than other investors in the area.
You must also remember your tenancy agreement, along with the laws of your state. Either may prevent you from raising your rents. That’s why many investors wait until the end of a tenant’s lease period before increasing the rent. With some luck, you can secure the tenant on a longer fixed lease at the new rate.
Tip #2 – Take a Look at Your Home Loan
Do you still have the same home loan you applied for when you bought your investment property? Australia has dozens of lenders who offer hundreds of mortgage products between them. Take advantage of that fact to secure a better home loan.
Work with a mortgage broker to find out what other products are out there. You may find that switching your loan gives you access to lower interest rates and some useful new features. Alternatively, you could use the information you find as leverage against your current lender. Most lenders want to keep reliable clients. If you’ve made on-time repayments, you may find that your existing lender offers a better deal when you threaten to leave.
Those are some long-term options. You could also switch your home loan to interest-only periods for a short while. This will help you to deal with more immediate cashflow concerns.
Tip #3 – Look at Other Income Streams
The property investment basics don’t always cover the other income streams your property may have to offer.
Take some time to think about how you could use your property to generate more than the rental income.
For example, you could lease the side of the building as advertising space if your property is near a busy road. Alternatively, you could lease out any unused parking spaces. Each offers a little extra income beyond your property’s rental income. Remember, that every little bit can help when you have cashflow problems.
Tip #4 – Examine Your Outgoings
Reducing costs is a crucial part of property investment. For beginners, this means taking a detailed look at your figures. You may find that you’re paying too much for your insurance. Or, you could negotiate a better deal with your property managers.
Many who encounter cashflow issues find that they’re paying too much for various services. You may also be paying for things you don’t need. For example, you could handle some basic maintenance issues yourself, rather than hiring somebody to do it for you.
Again, this frees up small amounts of cash. Nevertheless, you’ll improve your cashflow with each positive change to your outgoings.
Tip #5 – Get on Top of Depreciation
It’s amazing to think about how many new investors don’t think about rental property depreciation rates. They don’t investigate the claims they could make on their assets. Instead, they keep plugging away without a depreciation report. Alternatively, they assume their accountants have factored depreciation into their tax returns.
You need a depreciation schedule. If you don’t have one, you’re cheating yourself out of thousands of dollars.
Hire a quality Quantity Surveyor to draft a full depreciation schedule. Your surveyor will ensure you claim the maximum amount over the lifetime of each asset. Furthermore, you’ll learn more about tax compliance in your state.
Your Next Step
You’ll make both short and long-term improvements to your cashflow if you follow these tips. You can handle the first four with the help of an accountant and mortgage broker. However, you need additional help to create a depreciation schedule.
Washington Brown has the answer. Speak to one of our Quantity Surveyors today to get a quote.
An investment property tax deductions calculator won’t always show you everything you can claim. Many leave out the assets that go into a typical depreciation schedule. Here are the things that your tax depreciation schedule must contain.
When it comes to tax, there’s one question you must ask about your investment property: what can I claim?
There are the basics of course. Everybody looks into mortgage tax deduction. Australia is full of financial experts who can help with this issue. You may even find that an investment property tax deductions calculator can do the basics for you.
But what about property depreciation? It’s a type of deduction many investors miss, but it could save you thousands of dollars every year. Others make claims, but do so using the wrong schedule. Again, they end up missing out on thousands of dollars in savings.
You need to call in the experts. No, that doesn’t mean your accountant. Instead, a Quantity Surveyor is the professional you need to create a strong depreciation schedule.
The typical schedule will include the depreciation of capital works and equipment. However, some leave out other, less obvious, assets. Here’s what your depreciation schedule must contain if you’re to maximise your deductions.
You may have chosen a unit or apartment as your first investment property. Australia has several cities, which can make such properties a wise investment choice.
Naturally, you’ll claim depreciation on your unit’s assets. But what about the assets that it shares with other units in the apartment complex? You can claim for your portion of those too, but many investors miss out on these deductions.
Common items include fire extinguishers, air conditioning units, and lifts. You can also claim for ventilation and hot water systems. You don’t get to claim depreciation on the full value of the asset, but even a little bit can help with your cashflow.
Item #2 – Scrapped Items
Let’s assume you’ve carried out some renovations on your property. Oftentimes, you’ll have a bunch of assets left over that you no longer have a use for. Many just throw such items away, without giving them a second thought.
That’s a mistake. Old items have what’s known as a scrapping, or residual, value. This is the item’s value once it’s reached the end of its use.
You can claim a final depreciation sum on any items you intend to throw away following renovations. Such items include old appliances or carpets. Have a Quantity Surveyor create a new depreciation schedule prior to your renovations. This will ensure you catch any assets with scrapping value.
Item #3 – Common Outdoor Items
Let’s come back to shared items. It’s not just the common indoor items you can claim depreciation on. Any common items outside the apartment block itself have value to you as well.
This includes pathways, fences, and various landscaping items, such as pergolas. You may even be able to make claims on a shared swimming pool.
However, you can’t claim for all common outdoor items. For example, turf and plants won’t find their way into your depreciation schedule.
Item #4 – The Fees You Pay to Design Professionals
Did you realise that you can include the fees you pay to design and construction professionals in your tax deductions? Australia offers plenty of opportunities to build your own property. Investors often go down this route, rather than buying an existing property.
Your depreciation schedule must account for the costs of such construction work. This includes the money you paid to any designers or architects who worked on the project.
Make sure you supply your Quantity Surveyor with accurate receipts for these services. This will allow you to maximise your claim for the fees you pay.
Item #5 –Money You Pay to the Council
You may have to pay fees to the council for various services. For example, there are costs involved with lodging application fees, or getting council permits.
If you’re building your own property, you may also have to spend money on infrastructure. This might include gutters and footpaths.
Your depreciation report should include all these items. Again, this is something that many investors miss out on because they don’t think the costs relate directly to their properties.
The Final Word
Check your depreciation report again. Does it include all the items on this list? If not, you’re missing out on several Australian Taxation Officer (ATO) tax incentives for homeowners.
You need the help of Washington Brown to create an accurate tax depreciation schedule. Call us today to speak to one of our Quantity Surveyors about your property.
Six Things To Know Before Buying an Investment Property:
You may be thinking about buying an investment property. Australia has a strong property market, which attracts a lot of buyers. However, there are some property investment basics to keep in mind.
The attractive Australian house market has many people investing in property. For beginners, this means learning the property investment basics that will lead them to success. After all, property isn’t a sure thing. It may offer more security than investing in stocks, but you have to put the work in to generate an income.
So what do you need to learn before you invest in a property? Here are some things you must know about property investment for beginners.
Issues #1 –How Much You Can Borrow
You need to know how much you have to spend before looking for an investment property. If you don’t, you run the risk of finding the perfect property, only to discover that you can’t afford it.
You can get a general idea for how much money you need when buying an investment property. Calculator websites allow you to enter some figures to produce a rough estimate. They’ll ask about your income, in addition to any expenses you currently incur. These include everything from your debts, through to the dog food you buy each week.
However, you won’t know for certain until you speak to a lender. Most importantly, you must find out how much of the property value you can borrow. This will tell you how much money you must raise for your deposit.
Issue #2 – Your Investment Plan
Most people approach property investment with a simple end goal. They want to make enough money from their property to quit their jobs. However, many don’t really understand what this means. Enough money for one person may not be enough for another.
So, you need to have a plan in place before you start investing. Work out how much income you need your investments to generate before you can live off the proceeds.
This is your real goal. A vague notion of early retirement won’t keep you focused. You need to know exactly what you’re shooting toward before you invest your money.
Issue #3 – The Different Types of Gearing
You may have heard of gearing, without really understanding the concept. You need to learn what gearing is to create a strong investment plan.
There are three types of gearing: positive, negative, and neutral. Positive gearing means that your property generates enough income to cover its expenses, with money left over. You have to pay tax on your income when you have a positively geared property.
Negative gearing means your property doesn’t generate enough money to cover its costs. This may sound like a bad thing. However, you can use negative gearing to your advantage. Many investors offset the losses their properties make against other income sources, such as their salaries.
As the name suggests, neutral gearing means the income covers the costs. You don’t make any profit, but you don’t lose money either.
Issue #4 – The Choice Between City and Rural
There’s a huge difference between city and rural properties. City properties give you access to more people, which makes it easier to fill vacancies. However, rural properties allow you to charge higher rents. You can also buy rural properties for less money.
So, which do you choose? It all comes down to what you want to achieve. City properties tend to enjoy higher capital growth than rural properties. However, it’s easier to positively gear a rural property.
You need to do your research before creating any property investment strategies. Australia offers all sorts of opportunities. Consider area population, local economies, as well as demand when choosing where to buy your property.
Issue #5 – Who Provides Legal Advice?
You’ll have a choice between conveyancers and solicitors when looking for legal advice. Both work in law, but they’re slightly different.
Conveyancers focus solely on property law. They’re highly specialised, but won’t be able to help you with any issues that aren’t directly related to the property. Solicitors offer well-rounded knowledge on a range of issues. However, they also cost more money.
Your choice depends on the property. If you anticipate a lot of legal issues, hire a solicitor. This usually costs between $2,000 and $3,000.
A conveyancer costs approximately $1,000. Use these professionals if you anticipate a simple transaction.
Issue #6 – Your Exit Strategy
You should achieve success with proper planning. However, that doesn’t mean that you don’t need an exit strategy.
Your exit strategy determines how you’ll generate a profit from your investment. For example, you could decide to sell after a set amount of years to take advantage of capital gains. Alternatively, your exit plan may involve benefitting from the rental yield until you retire. Upon retirement, you could move into the property, rather than sell it.
The main point is that you need to know how you’ll exit the investment. If you don’t, you can’t take full advantage of the property during your ownership period.
The Final Word
Investing in property could help you to enjoy a greater level of financial comfort. However, poor preparation will lead to mistakes and potential losses. You need to know how to maximise your investment before you commit your money to a property.
Washington Brown can help you with that. Our Quantity Surveyors can help you to calculate how much you can claim in depreciation. Get in touch today to find out more.
Depreciation and Natural Disasters: Everything You Need To Know
A natural disaster could have a devastating effect on your investment property in Australia. You may need to get a new depreciation schedule to account for any repairs you make. Here’s what you need to know.
You cannot underestimate the effects natural disasters can have on an investment property. Australia deals with such disasters, and other issues, on a near-yearly basis. If such an issue affects your property, you may have to undergo a period of rebuilding. You’ll need to replace any assets you’ve lost, and possibly renovate or rebuild parts of your investment property in Australia.
This could make you wonder how natural disasters affect your rental property depreciation rates. On the one hand, you may have to pay out of pocket to bring your property back up to code.
After all, your insurance policy may not cover unforeseen circumstances. On the other hand, any improvements you make to the property improve its value. Your construction work could allow you to make more tax deductions. Australia has various regulations that ensure full compliance in such situations.
There are three situations you may find yourself in following a natural disaster. You’ll usually have to do at least one of the following:
Repair any damaged assets
Replace damaged assets that you cannot repair
Improve or upgrade an asset in the wake of the disaster
You must approach each situation differently to maximise your ability to claim depreciation. Let’s look at each individually.
Repairing Your Assets
Repairing an asset involves any work you undertake to bring the asset back to its original condition. This generally includes minor work only.
If you make any improvements to the asset, you cannot claim it as a repair. This includes any physical changes to its appearance, or altering the asset’s functionality. These are upgrades, and you must treat them as such.
So, what can you claim for when repairing an asset? It differs depending on whether you have insurance.
If you have insurance, you can claim for the cost of repairing the asset. However, you must also declare any sum you received from your insurance policy. This will have a direct effect on your tax deductions. Australia does not allow you to claim the full cost of the repair if you have insurance.
However, those without insurance can claim the full cost. This is because you won’t have received any help in making the repair.
Replacing Your Assets
On the face of it, replacing an asset seems simple. If you can’t repair your previous asset, you must purchase a replacement. You can then claim for this replacement on your tax returns.
However, the issue of improvement comes into play again. The asset you purchase must have the same specifications and functionality as the damaged asset. Any improvements move the asset into the final category, which changes how you claim for it. Simply put, if the replacement isn’t like-for-like, it’s an improvement.
If you have insurance, you have to make several adjustments to your depreciation report. You have to account for both Capital Allowance, and Individual Depreciable Assets.
Those without insurance must scrap the depreciation value of the previous asset. Replace this with the new forecast for the replacement asset.
Making Improvements or Upgrades
Anything that improves the original asset is either an improvement or an upgrade. This includes changes to appearance and functionality. You may also have to claim on the asset as an upgrade if it has different specifications to the original asset.
So, how do you handle the depreciation? If you have insurance, you take the same action as you would when replacing an asset. Adjust your depreciation report to account for the Capital Allowance. Don’t forget the Individual Depreciable Assets either.
If you haven’t got insurance, you must get arrange a new depreciation forecast for your improved asset.
Working with a Quantity Surveyor
In all cases, work with a Quantity Surveyor to make your adjustments. These professionals will help you to forecast your depreciation tax deductions. Australia is home to many Quantity Surveyors, so do some research before selecting somebody.
The role your Quality Surveyor plays depends on your previous actions. If you had your property assessed before the disaster, your surveyor will make minor adjustments to your previous report. This costs less than a full report.
However, you will need a full depreciation report if you didn’t already have one. This takes some more time and money. However, the report will ensure that you claim all the depreciation you’re eligible for.
The Final Word
A Quantity Surveyor can help you to maximise your depreciation claims after a natural disaster. Arrange a survey as soon as possible to ensure you don’t lose more money than you have to.
Washington Brown maintains a team of expert Quantity Surveyors. Contact us today to find out more.
Property depreciation is one of the largest tax deductions for homeowners in Australia. But did you know that you can backdate your property’s depreciation? Doing so could save you thousands of dollars every year.
As an investor, you need to take advantage of all the tax deductions Australia has to offer. Property depreciation deductions allow you to control your cash flow from your property. As a result, you can use them to enhance your property’s profitability.
Many who own an investment property in Australia claim depreciation yearly.
Unfortunately, some overlook these deductions entirely. Happily, you can backdate your depreciation claims. Firstly, let’s look at what property depreciation means.
You can claim for any loss of value resulting from the wear and tear of the property as it ages. Capital works are the building’s structural elements, and you can claim for all of them, including the roof tiles and the concrete used throughout the building.
You can also claim for the wear and tear of any equipment in the property. This includes things like the property’s fixtures, but extends to things like carpets and ceiling fans. (Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).
Claiming for your property’s depreciation is one of the most effective tax deductions in Australia. It allows you to reduce your yearly taxable income, which means your tax bill also decreases. When used correctly, depreciation allows you to take home more money each year.
Behind the deductions you claim for interest expenses, depreciation is one of the largest tax deductions in Australia. However, many investors fail to claim for all their property depreciation. Some even forget about it entirely, which could result in the loss of thousands of dollars over the lifetime of your investment.
Using Backdating to Claim Depreciation
So, what can you do if you haven’t claimed for all of the depreciation you’re entitled to? This is where backdating can help you.
There are two key steps you must take to backdate depreciation properly:
Work with a Quantity Surveyor to create a full depreciation schedule for your property. Your surveyor will inform you about every item you can make a claim for. They will also discuss rental property depreciation rates with you.
Bring the surveyor’s depreciation schedule to your accountant. He or she will alter your tax returns so that you claim for all of the depreciation you’re entitled to.
In most cases, you can only backdate depreciation for two years.
What is a Tax Depreciation Schedule?
If you’ve never claimed for your property’s depreciation, you may not know what a tax depreciation schedule is.
The schedule your Quantity Surveyor creates, offers a summary of every item in your property that depreciates in value. Think of it as an investment property tax deductions calculator focused solely on depreciation. The schedule notes every item, and informs you of how much you can claim for each over the course of the next 40 years.
As noted, your accountant can use this schedule to backdate your tax returns for the previous two years. However, they will also use it to help them to complete your future tax returns. This ensures you claim properly for all future depreciation of your property’s capital works and equipment.
Can I Backdate for More Than Two Years?
In most cases, you can’t backdate your tax returns for over two years. The Australian Taxation Office (ATO) has strict guidelines in place. These usually prevent you from exceeding the two-year limit.
However, that isn’t to say it is impossible. The ATO has different rules for companies than it does for individual investors. There are also different rules for those using a self-managed superannuation fund (SMSF), or a trust.
As a result, it’s worth speaking to your accountant to find out if your situation allows you to backdate for more than two years. It’s unlikely, but you may strike it lucky and be able to claim for even more depreciation than you expected.
Is Backdating Worth It?
Yes, it is. If you don’t account for your investment property depreciation, you could lose out on thousands of dollars every year. In fact, claiming for depreciation can turn a negatively geared property into a positive one.
On top of that, you can also claim the cost of your Quantity Surveyor as a tax deduction.
The Final Word
That’s everything you need to know about backdating depreciation. Speak to your accountant today to find out how far you can backdate your claims.
Washington Brown is here to help if you need a quality Quantity Surveyor. Contact us today to get a full depreciation schedule for your investment property.
Before starting your career as a property investor, you need to arm yourself with more than the property investment basics. If you don’t, you may end up making some costly mistakes.
Investing in property is more difficult than you might think. It’s certainly a more reliable way to generate an income than other types of investment. However, that doesn’t mean that there aren’t any risks involved. In fact, approaching property investment without a plan could result in you losing a lot of money.
As a result, you need to learn more than the property investment basics before you move forward. There are all sorts of mistakes you could end up making when investing in property. For beginners, these mistakes could lead you to financial ruin.
Mistake #1 – Using Emotion to Make Decisions
Think back to when you bought your first home. What were you looking for? Most buyers look for something that draws them to the property. They may have specific features in mind, or they fall in love with the décor.
This leads to them making decisions based on emotion. This is fine when buying for yourself, but it causes major issues when buying investment property. Australia has millions of people who don’t think like you do. They’re your potential tenants, so you have to buy with them in mind, rather than yourself.
Basing your decisions on emotion means you may spend too much on the purchase. It also blinds you to what your prospective tenants would want. Instead, you need to think about the needs of your target market. If the property doesn’t cater to them, move onto the next opportunity.
Mistake #2 – Failing to Manage Your Cashflow
While the property investment basics often cover how to find a good property, they don’t always focus on issues like cashflow. The fact is that property investment is a business. As a result, it comes with the same pitfalls as operating a business.
You need to understand all the additional costs that come with your property. For example, you have to account for how much the property will cost when it’s unoccupied, as well as when it has tenants. Unexpected maintenance can also place a burden on your finances. Of course, there’s also the issue of tenants failing to pay on time. All these problems affect your cash flow.
Many investors recommend holding back a tenth of your property’s value to cover such issues. If you don’t, you may find that the unexpected costs lead to failure. An investment property cashflow calculator could help you to stay on track.
Mistake #3 – Going it Alone with the Mortgage
You may think you can handle the stress of finding a mortgage for your investment property. However, this is usually a mistake.
Going it alone often means that you miss out on some of the best financing options. Remember that lenders want what’s best for them, ahead of what’s best for you. The wrong financing can come back to bite you later on. You may end up paying more interest than you ought to. Or, you may not have access to special loan features that could help you.
As a result, it’s best to work with a mortgage broker when searching for a home loan. Their expertise may prove invaluable. Plus, they can often provide access to mortgage products you wouldn’t find on your own.
Mistake #4 – Not Finding Out About the Seller
The seller’s situation will affect how you approach negotiations. However, many investors don’t even try to find out more about the seller.
Most sellers won’t give you a direct answer if you ask why they’re selling their property. However, that doesn’t stop you from looking for clues. For example, you can use your property inspections to look for signs of poor maintenance. This often suggests that the seller is undergoing some personal or financial hardship.
You can use this information to strengthen your negotiating position. It may seem cruel, but remember that investment is a business. Don’t allow your emotions to prevent you from getting a great deal.
Mistake #5 – Not Doing Adequate Research
The need for research is one of the property investment basics. However, plenty of investors fail to learn as much as they can about the property market before spending their money.
Reading a book or two won’t equip you with the knowledge you need. You have to learn about the specifics of the property’s area to stand any chance of success. Talk to local estate agents and people in the surrounding neighbourhood. Research property prices to ensure you’re getting a good deal. Most importantly, find out what the area has to offer that might appeal to your tenants.
This will take time, but it’s worth it. Quality research lowers your risks, which increases the chances of achieving success.
The Final Word
Many novices make some critical mistakes when entering the property investment sector. They only read about the property investment basics, which results in them crashing and burning. In the end, they end up losing thousands of dollars.
You must avoid these mistakes. Furthermore, you need to consider the tax implications of owning an investment property. That’s where Washington Brown can help. Speak to a Quantity Surveyor today to find out more about claiming for the depreciation of your assets.