Don’t Be Put Off Because You Can’t Explore The Property
There are many things you need to consider when buying an investment property in Australia. While the process may be exciting, it can also be confusing.
One of the main choices you need to make relates to the type of property you buy. Do you purchase an older property that has a track record of generating income, or a brand new property that may stand a better chance of meeting the demands of tenants?
What if we told you there’s another way? Instead of buying a property that already exists, you can buy one that’s under construction. This idea may stray away from the property investment basics that you’ve read about while working out the complexities of investing in property for beginners. However, we can offer six reasons for why an off-the-plan property could prove to be a wise investment.
Reason #1 – Earn Early Capital Growth
What’s one of the first investment property tips for beginners that you’ve heard? It’s probably to buy low now so you can make a profit later. Buying an off-the-plan property allows you to do just that. So how does it work? It’s simple. You pay a deposit to the developer, and this secures your ownership of the property.
However, the construction settlement date may be several years in the future. As a result, you can earn capital growth for the home, even during the period prior to construction. You won’t even have paid the full price of the property before it starts making money for you.
Reason #2 – Stamp Duty Savings
Buying an investment property in Australia comes with a lot of added fees. The largest of these is often stamp duty. In most states, you will have to pay thousands of dollars in stamp duty before you can take ownership of the property. Take Victoria as an example. For a property worth $500,000, you’ll have to pay almost $20,000 in stamp duty.
Buying off-the-plan can help to avoid this major fee. Most states don’t charge stamp duty on properties that don’t exist yet, which means you make thousands of dollars in savings from the beginning.
Reason #3 – Extra Saving Time
You only have to put down an initial deposit when you buy an off-the-plan property. As we mentioned before, you may have to wait for a couple of years before construction finishes.
This gives you plenty of time to save some money. Once construction ends, you could have thousands of dollars that you wouldn’t have had if you’d bought an existing house. You can then put this money toward your home loan, reducing the principal so that you pay less interest on the loan over time.
Reason #4 – You Can Claim Depreciation
You may be planning on renting out your off-the-plan property when construction ends. If so, you may be able to claim thousands of dollars in tax deductions in Australia on the property.
Make time to create a depreciation schedule with the help of a quantity surveyor. This will highlight all the things that you can claim as depreciation upon completion of the property. This may include the new furniture and fixtures that you add to the property before making it available to tenants. The higher the depreciation, the lower your holding costs.
Reason #5 – You Can Pick the Perfect Plot
Showing early interest in a new development comes with its own advantages. In addition to benefitting from the lower prices that developers often charge to their early investors, you also get to choose from the best plots of land.
This will benefit you monetarily when construction ends. Getting in early means you can pick the property that will have the best views or offers the amenities that your tenants will want. As a result, you can charge higher rents, so your property generates more income.
Reason #6 – Reductions in Other Costs
A brand new property does not come with the maintenance needs of an old property. That should go without saying. You won’t have to earmark thousands of dollars for repairs, as the property should be good to go from the moment construction ends.
However, did you know that off-the-plan properties could save you money in other areas? It’s all thanks to recent changes in the Australian Building Code. New properties must now meet several energy efficiency criteria. This means the cost of utilities falls, which benefits both you and your tenants.
The Final Word
Buying off-the-plan may seem scary at first. After all, you don’t have the opportunity to explore the property before you buy it.
However, it opens the door to savings that you wouldn’t have access to with an existing property. To find out more about buying an off-the-plan investment property in Australia, contact Washington Brown today.
A lot of people buy property when interest rates go right down. For example, two years ago there were a lot of people buying property because interest rates were extremely low. And of course, it makes logical sense. Everyone goes out and buys when this happens, which generates a higher demand in the market. But who would not want to buy property if you can lock in interest rates and borrow at 5% for five years?
But for me, I prefer not to rush. Sometimes, I choose to sit back and wait when the market is hot. I’ve learnt that sometimes being patient with your money is a virtue. You don’t have to buy something every year. It might be better to save up for 10 years, and then come and pounce when not as many people are in the market.
Sometimes when the rate goes up to 9% and no one can afford to buy. So, I’d actually rather buy then and have enough money. That way I don’t have to worry about having a big debt or fighting with other investors. You don’t want to be in so much debt when rates go up again.
I don’t want to buy when there are 100 people going to auction against me. I’d rather buy when there are not a lot of buyers.
Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!
Sipping on a cocktail while lying on a pristine beach over the summer holidays, you were ruminating about how fantastic this lifestyle was.
Perhaps you were watching your kids running around in the shallows of the water, screaming with delight, while your partner sat on the beach beside you beaming with joy.
“Life doesn’t get any better,” you thought.
And then it happened; you were hit with a brilliant idea. “We should buy a holiday home here!” you shouted. And your family cheered with joy.
Wanting the euphoria of holiday happiness to last forever, you meandered past the windows of real estate agencies, promising you’d keep looking online when you got home, making a purchase as soon as you got loan approval.
But now the holidays are over and you’re back to reality. Does investing in a holiday home still seem like a great idea?
You’re not the only person that’s had the same idea. Roy Morgan Research reported that in 2014 one in 40 people owned a holiday home. This figure equated to less than 3% of the population who actually followed through on their impulse.
It’s easy to get caught up in the romance of owning your own holiday home, and wanting to make an emotional purchase while you’re on holidays.
However, the wisest move is to give it some time before you act. Let the memory of the holiday fade in your mind so you can think logically and make a more informed decision.
Will it make for a good investment?
While you might have had a great holiday in your destination of choice, there are a whole myriad of factors to consider before you jump the gun and buy a property, and there are lots of pros and cons to weigh up.
First of all you need to consider whether a holiday home in your chosen location would even make for a great investment. Is it an area that will experience capital growth or where you’ll get above average rental returns?
In the majority of cases, areas that are really attractive holiday destinations usually don’t have high growth potential because they lack the must-have fundamentals for investment properties.
Many holiday destinations are simply tourist hubs and don’t have the factors needed to support permanent and long-term population growth, such as the necessary infrastructure and amenity, and long-term jobs, which is vital to maintain demand for your property and to drive capital growth.
Indeed, we visit them because they don’t have these factors – they’re much quieter and more subdued than busy capital cities.
If the area you’re looking at is a smaller hub with seasonal demand – such as a ski town or a beachside location – you’ll need to plan for how you’ll pay for your lifestyle property during these times, when demand is low and it’s not tenanted.
But you should first consider whether it’s worth buying a property that doesn’t have fantastic potential for growth at all.
Is it for pleasure or business, or both?
While I believe any property should be purchased with its investment potential in mind, it’s worth considering whether you’re buying the property strictly with your lifestyle in mind, for you to use on holidays, or whether you’re also buying it to rent out and make some income.
If you are buying largely for the lifestyle aspect, have a think about whether you will really use the property as a holiday home all that much in the future. Will you actually be able to get away from the grind very often to make the most of it? And what if you get bored of going to the same place every year?
Even when you do stay there, how relaxing will it be when you need to do all the chores you do at home, such as mowing the lawns and other maintenance? It’s not the same as simply renting a property for a few weeks that someone else is responsible for.
You’ll also need to consider when you will want to use the home – and that will likely be at peak holiday times, when rental demand is at its highest and when it’ll be of the greatest financial benefit for you to rent it out.
Will the returns outweigh the costs?
Many people justify buying a holiday home by saying that the returns will outweigh the costs. But will they?
They’re often cheap to buy, but consider why they’re cheap – have you just happened to snag a bargain or is it because demand in the area is low? If it’s the latter, what will happen when it comes time for you to sell, or even to rent your property? Will you be able to find tenants and get that impressive return?
The returns can certainly be higher than ordinary rental properties when tenants can be found, but it’s seasonal. The average period of high demand for holiday rentals is eight to 10 weeks a year, so this is when you’ll get the greatest rental returns, and it may be fairly quiet for the rest of the year.
According to RateCity, investors should aim to cover one month’s mortgage with one week of rent, which means you can pay the annual mortgage in only 12 weeks, giving you plenty of breathing space and time to use the property yourself.
Before you buy it’s essential to carefully calculate what the rental yield will be to make sure you can cover the mortgage payments. Part of this will include considering your expenses, which, in addition to those for an ordinary rental property will include greater upkeep and cleaning costs, as well as management fees, with the property being rented more frequently on your behalf.
Insurance may also be higher than a normal property, as insurance providers often find greater risk associated with these properties since they’re often vacant.
Just like any investment property you’ll need to have a financial buffer in case of slumps in demand or unexpected costs, but the risks can be higher with holiday homes since demand is so seasonal and tenant turnover is high.
Tax is the big benefit
There are good tax benefits associated with owning a holiday home – if it’s available for rent – which may help with your cash flow and even make buying the property worthwhile.
If the lifestyle property is simply for your own use there won’t be any tax concessions, but if you rent it at least for part of the time there will be substantial tax benefits.
In line with negative gearing allowed by the Australian Taxation Office (ATO) owners of holiday homes can claim expenses such as interest, maintenance and repairs as a tax deduction, just as you would for any investment property, boosting your tax return.
If the holiday home is available for rent all year round you can claim all expenses, but if it’s only available for part of the time you can claim expenses for the time that it’s not being used by you, which is likely to be the majority of the year.
The major benefit of holiday homes at tax time is the ability to claim depreciation as a tax deduction – while you can do this for any property, the allowances are often greater for lifestyle properties because they’re fully furnished, with not only big ticket items such as beds, couches and whitegoods, but smaller items such as cutlery and crockery.
(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017, or if the items are brand new and you never use them yourselves – Read about the Budget changes here).
As long as the property is available for rent most of the year you can block out a two-week period over Christmas and claim the depreciation pro rata. You are still entitled to the deduction regardless of how many weeks the property is actually rented out, as long as it was available for rent for a full 50 weeks.
The key thing is to have a depreciation schedule completed before you rent the property out to maximise your deductions.
It’s also essential to keep documentation and evidence to show when your property was leased and what the expenses were during those times so you can provide this information to the ATO.
The ATO has cracked down on holiday homes in recent years so don’t break the rules – if you get caught there will be penalties.
Don’t make an emotional decision
While it’s easy to get caught up in the holiday hype and make an emotional decision to buy a home, think carefully before you act.
It’s often a better idea to simply pay for accommodation in the few weeks of the year that you take holidays and to buy an investment property in a location that has better potential for capital growth over time.
Many investors find that the financial burden of the expenses associated with a lifestyle property, including the purchase price, maintenance and bills, as well as dealing with the headaches of holiday tenants and letting agents, far outweigh the return.