Creating Wealth Out Of Property

When looking through today’s BRW its no wonder you see so many millionaires and billionaires who have made their wealth from investing in property.

Today, with the advancement of property portal sites, researching property can easily be done from the lounge room of your own home with a stream of information available at your finger tips.

When buying property it’s important to remember that it is best served as a long term investment – with property values in most areas doubling every 10 years in Australia. However, there are many other things you need to consider when buying your first home, an investment property or upgrading your own home if you are looking to make your wealth out of property.

Location, Location, Location

When purchasing it’s important to keep in mind rental affordability, proximity to public transport, shops, recreation areas, schools, and medical facilities as these are most often important factors of potential buyers and renters.

Know What Your Legal and Tax Obligations Are

Every state has varied legal costs and taxes associated with buying and selling a property. For example, if you were to purchase a $300,000 property in Victoria you could pay as much as $12,000 in Stamp Duty.

It’s a good idea to check out State and National Government websites as there are often concessions or grants for building, or buying your first home. If you’re selling an investment property for a profit, you will more than likely have to pay a Capital Gains Tax (CGT).

CGT is calculated from the net capital gain minus your total capital losses for the year and any unapplied net capital losses from earlier years. You may also be eligible for a CGT discount or small business CGT concession, and if you hold the property over a 12 month period then you may be eligible for a CGT discount too.

If the property is your primary place of residence then you may not have to pay any CGT at all – provided you hold the property title for 12 months or more. Many renovators take advantage of this as it allows them to live in the property while they make improvements for their profit.

Is Less Really More With Deposits?

Today many lenders are tightening their lending criteria by increasing the deposit amount required for buying property. However, solid research and a good financial broker that has a good understanding of your investment goals can go along way to helping you achieve your wealth goals.
Many investors use equity in previous properties to purchase multiple properties without having to put in any or very little of their own money. For example, you may own a property valued at $450,000 and owe $300,000, which gives you $150,000 in equity. If the purchase price of the investment property you wish to purchase is $300,000, on a 90% loan to valuation rate (LVR) you would need a 10% deposit, legal and Stamp duty costs and in some cases Lenders Mortgage Insurance.

So the break down on the deposit and fees to purchase that $300,000 property would be:

• $30,000 Deposit (10%)
• $12,000 Stamp Duty Costs (using Victoria as an example)
• $6,600 Lenders Mortgage Insurance (approximately)
• $1,800 in transfer/legal and miscellaneous costs

If you chose to take the deposit and fees out of the $150,000 in equity out of one of your other properties you could potentially borrow 100% of the $300,000 purchase price, and in some cases, lenders may even lend you the mortgage insurance on top of your loan amount.

Serviceability of a loan

Even if you have equity in a property a financial lender will always consider your loan serviceability ability. They will consider your income, family situation, credit history, other debts including personal loans and credit card limits and expected rental return of your proposed investment property.

It recommended, even if you have nothing owing on your credit cards, you reduce the spending limits as every multiple of $5000 credit limit will cost up to $25,000 in borrowing power.

Positive and Negative Gearing

When you receive a rental return on your investment property it’s considered an income. As a result it’ll be added to your yearly earnings.

So, say you have a $300,000 mortgage at a 7% interest rate on an interest only loan then your repayments will be around $1750.00 per month. If you receive $1,300 per month in rent, you’ll have a shortfall of $450.00 per month to put back into your investment property. As your investment doesn’t cover itself and requires you to inject money into it, you are negative gearing your investment property.

When you incur losses you can offset your loss against your other assessable income too (e.g. salary, wages or business income). This enables either a reduction in payable tax or a larger tax refund at the end of the Financial Year.

If it’s the other way around - rental income received and maintenance costs are greater than the total amount of the expenses - it creates a situation where tax must be paid on the net income. This is called positive gearing.

Having a positive geared property puts you in a great financial position because you are earning positive money from your investment which reduces your financial liability to any lender. But don’t worry if your investment is negative geared. In most cases a newly purchased property will be negatively geared before becoming positively geared.

So, whether you are looking to purchase your first home or investment property, making wealth out of property doesn’t come overnight. Being sensible with your income, researching and allowing time for your assets grow will lead you on the path to success.

July 2010