So you have $100,000 in equity but not sure what to do next?
You hit Google and search “property investment” and lo and behold there is way too much information out there and the further you get into it, the more complicated it seems. Once you start on this process, it becomes harder and harder to make a decision as conflicting information is everywhere. Some will rush to come to your home for a supposed “education session” and those slick salesmen have a ready answer for every objection.
Advice such as:
– You must buy “off the plan” as you get better depreciation and save on stamp duty…
– You should have all your loans at different banks so the big bad banks can’t get at your assets…
Your alarm bells start ringing! So many people saying “do this” or “don’t do that” and none of it makes sense anymore and you start to think you had better pay someone the big bucks to do it for you, because it is all too complicated. BUT WAIT!
Stop right there!
The Golden Rule is if you do not understand what is going on then it is the WRONG thing for you to do. So make sure you always understand your finance decisions and what feels right for you. It is a heart as much a head decision.
Here are 10 KEY questions you should be asking to help you make decisions for yourself, divided into 3 decision making areas:
Firstly, decide who you want to work with and how they can help you. Start forming your team of professionals by starting with finance – it is the basis.
1. Do they take commissions when selling property or referring me to someone else who sells it? If YES, then steer well clear as this advice can NEVER be in your best interests when establishing a property investment plan. Whether it is your accountant, mortgage broker or anyone else, be wary.
2. How does the person you are working with decide which solicitors/conveyancers and others to recommend? E.g. are they giving or receiving referral fees? Once again, if they work with people who refer for fees, their advice cannot be independent. We refer only to people who do a good job for our clients and they refer to us for the same reson. If they stuff up, we no longer refer – it’s that simple.
Find a good mortgage broker who is independent, has dealt with a lot of property investment, preferably invests themselves and has clients who have lots of success. It is never just about the cheapest interest rate but about service and long term planning.
Secondly, get your structure and deposit in order.
3. Do you have an accountant who understands your plans long term? Not just someone who meets you after July 1st to do your tax each year. You need someone who is interested enough to start with questions about making long term planning decisions such as how do you intend structuring for asset protection? What is the best structure if you buy an investment property? Whose name or entity should it be held in? This is even more important when you own a business. However, be wary of anyone who says you need a new Trust and Company structure for each investment – you can be sure that is how they are making their money with annual returns for each entity. Over structuring can be as fatal as under structuring so if it doesn’t make sense to you, then DON’T DO IT. The test is can you explain it to someone else.
4. Do you have a separate investment loan for your deposit on a house? This is vital BEFORE you start checking real estate on the internet. You should not be redrawing cash from your home loan to use as an investment deposit as that is mixing the purpose of the debt. According to Julia Hartman¹ from BAN TACS, “a recent AAT case decided that if loan funds are intermingled with other funds before being used for income producing purposes they are no longer considered to have their source in the (tax deductible) loan”.
5. Do you spend less than you earn? If you cannot manage to save – even a small amount each week, then you should not be putting your family and yourself under any further pressure because no matter how much advisors say you will save on tax, you need to have money available and it should not just be from borrowing.
6. Are you paying down debt? If you already own your own home, are you managing to pay down debt? Many banks are now offering discounts for owner occupied loans which are paid by principal and interest. Interest rates on investment debt are inevitably higher. If you have no personal debt, start paying off your investments. Some of my saddest cases are clients in their late 70’s – still with owner occupied debt because some accountant told them not to bother paying it off as it was tax deductible debt. The aim of the game is not TAX deductions but building wealth for the long term.
7. Are you using an offset account? Banks now offer many features on loans as part of professional packages. You can have one offset for everyday use and another for longer term savings. Learn how to manage your money well by proper structuring and focus on what you are trying to get out of it.
Finally, it is time to look at what property you should invest in.
8. How many properties can I afford to buy for investment and what sort of return am I trying to achieve for my retirement? Is the plan to make money quickly? Then consider moving into the “property, renovating, selling and moving on” as this way you can avoid capital gains tax. Or, am I holding out for long term growth and rental return so this property can provide me an income in retirement? The problem for most investors is no long term decision was ever made – they just thought they should buy an investment property because they either inherited it from parents or thought their children might use it when going to university. Most investors fail according to AHURI², the Australian Housing and Urban Research Institute, because they sell too early as the property was costing them too much to hold. When school fees need to be paid, or lifestyle is suffering because of an investment property, you know which one will go first.
9. Where should I invest? According to Terry Ryder³ from Hotspotting.com.au the key criteria is infrastructure – education, medical and transport, amenities – public and private funded lifestyle factors (café strips, new shopping centres and parks from industrial areas) and job nodes, which may be a long way from the CBD but worth considering.
10. What should I invest in? Again it goes back to your plan for this property and if you are renting it out to hold longer term, your first question must be “What do tenants in this area want?” It is no good just looking at the median growth or average property price if most tenants are paying more for 4 bedroom, 2 bathroom homes. Do research with property managers who are the experts in their areas as they need to make sure any property they get they can rent out.
Footnotes:
Julia Hartman¹: http://www.bantacs.com.au/
AHURI²: http://bit.ly/2fBvYlz Terry Ryder³ : Hotspotting.com.au
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