What is an Investment Property?
Media outlets across Australia report on the property market daily. Housing price movements, sales volumes, affordability and buyer sentiment all make the news regularly.
The investment property market is often part of the discussion, but let’s go right back to basics – what is an investment property? And more importantly what makes a good investment? How can a prospective investor make the most out of their property?
What is an investment property?
An investment property is a residential or commercial property used to actively produce income, otherwise known as rent. Seems simple, right? However, a number of factors determine just how successful an investment property will be.
Types of investment properties
Investment properties come in all shapes and sizes from houses, units, townhouses, duplexes to offices, warehouses, hotels and other types of commercial properties.
When it comes to deciding what type of property to invest in, it really depends on your investment strategy and budget. Strata properties are usually a good starting point for first-time investors as they are sometimes more affordable. Meanwhile, owning an investment property with someone else can be an affordable way to enter the market while splitting ongoing costs.
Investment property income
Rental income and capital growth are the two main ways investment properties generate money for their owners.
1. Rental income
Rent is the amount the tenant pays to the property owner (landlord) to occupy the premises. It is a regular source of income for the owner, although it can fluctuate with the rental market and tenant reliability – so it pays to do your research.
Vacancy rate is a good indicator of rent reliability. For example, a high vacancy rate means there’s less demand for rental properties in the area. While a lower vacancy rate means there’s higher demand and rental rates can move up. Therefore, it’s important to check the vacancy rate in the area you’re looking to invest in.
There are also tax benefits of owning an investment property that boost rental income further throughout the time it’s available for lease. You can claim many tax deductions in relation to owning the property, which will reduce your taxable income.
Just some of the things you can claim as tax deductions include interest repayments, depreciation, property insurances, rates, repairs, maintenance, management fees and much more.
2. Capital growth
It is important to understand that any property investment can be affected by market price fluctuations; the value of your property can rise and fall. But the goal of any property investor is capital growth. This is the increase in the value of their land and property over time.
The outcome of this is when the time comes to sell the property, the owner may make a significant profit (or loss). Depending on the investment strategy, some may favour long-term capital growth over short-term rental income, others may be more interested in weekly cash flow.
How to get the best return from an investment property
Now that we are across what investment properties are and how owners make money from them, how do they maximise the return? Here are some of the key strategies savvy investors do.
1. Strong rental returns vs strong capital growth
Strong rental returns and capital growth usually work against each other.
The key to getting the balance right is holding properties that are mixed or choose a location that it suitable for your overarching investment strategy.
2. Attract high-quality tenants
The rent you receive is what maximises your return throughout the lifecycle of your investment property. Therefore, it’s key to make sure that this flow of income is reliable and at market value.
Finding high-quality reliable tenants is the key to safeguarding your rental income. Attracting these tenants from the very beginning is essential, while keeping them happy throughout the tenancy will increase the likelihood of them staying. Even the small tasks like getting repairs sorted quickly and efficiently, maintaining the property ang giving appropriate notice prior to inspections go a long way in keeping tenants happy.
3. Make improvements wisely to accentuate returns
Renovating an investment property is a costly exercise, but when done wisely can help you achieve the balance of increased rental returns and the overall value of the property.
Achieving bang for buck is the trick to doing this; make improvements that will help attract high-quality tenants while increasing the amount of rent you can charge.
These don’t necessarily need to be extravagant additions. For example, adding a functional internal laundry, a separate bath and shower in the bathroom or a quality stove and oven.
4. Claim all deductions
Holding an investment property means you have access to more tax deductions. Claiming these is key to boosting the return you receive from your property. It doesn’t need to be a hard paper-tracking practice and tools such as MyBMT help you keep track of all expenses and share them directly with your accountant.
Claiming the hidden expenses can boost your cash by thousands in just one year. The biggest hidden deduction is the depreciation available from the natural wear and tear of the property and its assets.
Depreciation isn’t easy to see as you don’t need to spend any money in order to claim it, making it a non-cash deduction. If you would like our office to provide you with an example table of depreciation that will demonstrate some depreciation deductions you can expect for both new and old properties we would be happy to forward it you, please reach out.
