Frequently Asked Question
Australian Residential – Frequently Asked Questions on property investing:
If I want to retire on at least half my current salary, what percentage of my income do I need to set aside?
One of the most frequently asked questions (FAQ) for investors is if i am not utilising property investment and i want to retire on the equivalent of only half of my current salary, then 12 per cent of wages every year of my working life (40 years) must be set aside. That’s a long way short of the 9% contributed under the current superannuation guarantee charge. Remember, half your current salary would result in a considerable change to your lifestyle.
Superannuation, the Pension, What are my options looking like at Retirement ?
Over the past 10 years the Federal Government has made it harder to qualify for the aged pension and has indicated it will make it even tougher in the future.
The introduction of the assets test, deeming on savings accounts and changes to the treatment of shares and unit trusts have all ensured that fewer retirees will get the pension.
Retirement used to be a time to enjoy. Today it is a time to fear. Australia’s retirees are fast becoming the nation’s poor, squeezed by lower interest rates which is slashing the income of their investments and starving them of funds to pay bills.
Today’s retirees are providing a sobering lesson for future generations. Poor retirement planning has cost them their lifestyle. Retiring rich means starting to plan early and building a separate retirement nest egg on top of superannuation.
I thought property investment was for high income earners or the wealthy?
Property remains one of the most popular investments for Australians on average as well as high incomes. It is very important to seek the advice of a qualified finance professional before investing. “It’s not how much you earn that counts, it’s what you do with what you earn”
Why invest in property, as opposed to shares or term deposits?
In plain terms, negative gearing allows people to borrow money to purchase an income producing property, to claim a tax deduction for many expenses they incur running that income producing property … including loan interest.
You tax rebates, along with your rental income are used to pay off your loan, with the tiniest in amounts coming out of your own pocket.
The end result … down the track, the tax man and your tenants will have paid most of your running costs for you and your property will have more than doubled in value, so you can now sell it and earn a tidy profit, or use this system to accumulate multiple properties to use the rental income as part of your retirement portfolio.
In the early stages of investing in a negatively geared property, your costs like interest and so forth, are higher than the rental income you receive, so your property is negatively geared.
Apart from negative gearing, there are two other types of gearing situations which offer you even more benefits.
Firstly, there’s neutral gearing which happens with the costs incurred “running” your income producing property match the income that the property generates. And then there’s positive gearing, where the income from your property actually exceeds the costs of running the property.
Negative gearing is the first step for most investors because, through the HUGE tax deductions offered, it is by far the most affordable, so it enables you to purchase multiple properties for a low up-front and ongoing cost.
Once your loan has reduced, and your property has increased in value, you’ll start to experience neutral gearing. This process is greatly accelerated with Mortgage Reduction.
Then down the track your portfolio will be positively geared which is the ultimate goal for many investors, enabling you to retire on a very comfortable income … much higher than you’d expect through superannuation.
Do I need a large deposit to purchase an investment property?
As you know, when you bought your first home, you had to come up with a cash deposit of up to 20% of the purchase price, and also be able to afford the monthly mortgage repayments of many hundreds of dollars. If this was the same for buying an investment property, nobody would ever be able to afford it. Thankfully, in most cases, its not!
If you have owned your own home for a few years, you will have built up quite a bit of equity in your property. You will have paid off some of the loan, and there’s a good chance that your property has increased in value too.
Instead of finding a cash deposit, the Bank/Lender (subject to approvals) will allow you to use the equity built up in your home as security on your investment property
Why do some property investments work better than others for their owners …. and what can I do to make sure my property investments do perform?
Essentially, property investment performance means minimising your ‘out of pocket’ expenses and maximising your potential capital growth. Some of the reasons property investments fail to perform as expected can include:
- The loan taken out was structured wrongly;
- The loan was taken out in the wrong name;
- “High maintenance” houses were purchased;
- investors missed out on claiming the highest possible amount in non-cash tax deductions;
- Low rents and high vacancy periods;
- Paying too much for the property in the first place;
- Low capital growth potential.
These mistakes can easily be avoided. Before investing, contact us for free advice on which price range, which area and type of property are most suitable for your situation.
What if we can’t find a tenant for our investment property?
Vacancy has two main causes-firstly, the amount of rent being asked, and secondly, the location of the property. If you can’t find a tenant at the advertised rent then lower the rent until a suitable tenant is found. A good property manager understands this and will direct you accordingly. Your rental should be in a good location where there is a demand for rental properties; e.g. close to transport, shops, schools and employment.
The 70% home ownership ratio is the main reason for the security, reliability, and predictability of residential property as an investment. Owner occupiers, people who own their own homes, do not panic and rush to sell as investors do in some other sectors such as industrial and commercial real estate, or as company shareholders do when times get tough. The residential property market is not dominated by investors. This provides a built-in safety net for the residential property market. Residential property is the only investment market not dominated by investors. It forms a barrier against substantial down-side in the market place.
That is a unique feature of residential property as opposed to all other investment vehicles. Everybody must be housed, whether they rent, or are owner occupiers. No matter who the occupier is, the capital growth is still generated for the owner. The safety of residential property is underpinned by owner occupiers who do not sell if a market lacks strength. They need more compelling reasons, are better placed to hold through softer markets and continue to need a roof over their heads.
Historically, what happens investment-wise with residential real estate?
If we go way back in history to the year 1086, we can review the Doomsday Book, commissioned by William I, King of England – and it did not herald the end of the world, even though it sounded that way! It was a schedule of land values across Britain at that time. It has been calculated from that base, that values have increased in England over the last 900 or so years, strangely enough, at around 10% per annum.
It is that compounding effect of property value increases which is so powerful. As each year passes growth occurs on top of growth. If a property is worth $100,000 today, and next year it increases in value to $110,000, then the year after that it increases at 10% again, that is $100,000 plus 10% (or $11,000), taking its new value to $121,000, and on goes the escalation. It’s exponential growth accelerating at a faster rate as each year passes.
To use a well worn gardening analogy, it is a little like planting a tree. Early growth is slow, but as it establishes itself it grows faster, and starts to fruit. The fruit drops, and more trees grow and start bearing fruit. Before we know it, we have an orchard. It is a similar kind of compounding effect with property. Property wealth comes ever so slowly at first, but eventually arrives in abundance. But you have to make a start, no matter now small. With prudent property investment all you need is time, the right information, and patience.
What if I become unemployed or to sick to work?
Your loan should be set up with a 3-month buffer to give you breathing space in case of unemployment. Should your job prospects not improve you would simply sell the property. Personal trauma insurance will protect your income if you have an accident or are too ill to work.
Interest rates have been falling but what if they rise?
When taking out a loan from a Bank you have the option of staying on at a lower variable rate of interest or paying a slightly higher interest rate and having it fixed for up to five years. Some investors like the security of a fixed rate but this can cause issues if you wish to sell, seek the advice of a qualified finance professional when organising finance.
What if the property is damaged?
All the major insurance companies offer comprehensive policies which cover most forms of damage [e.g. damage from a war is not covered.] The cost of such a policy is minimal and tax deductible. For a small cost you can even extend the policy to cover loss of rent.
Who manages my rental property?
Property managers today are generally highly trained and qualified individuals who form the backbone of the real estate industry. In the case of Australian Residential clients, we will recommend a property manager who is an expert in your chosen suburb and has an excellent track record in landlord and tenant relations.
How do I claim a tax deduction on my rental property?
There are several ways depending on your employment status. For instance, if your a PAYE wage or salary earner you could arrange for your employer to deduct less tax from your pay every pay period [section 21]. Alternatively, you could simply receive a lump-sum rebate at the end of each tax year.
We’ve only got about 9 years to retirement, have we “missed the boat”?
Definitely not, no matter what stage of life you are at, by setting goals now and planning ahead, you will prepare yourself for whatever opportunities and obstacles that may present themselves along the way.
For most mature people, the greatest fear is that they will live longer than their money. Fear of poverty is the number one fear from which the majority of people suffer. Sadly, so few take any action to prevent poverty or are blissfully ignorant of what the future holds for them.
There are six main reasons why 93% of the population do nothing about tackling their fear of poverty and they are:
People don’t plan to fail, they fail to plan!
Most people wish for wealth, but few have a definite plan and the burning desire which pave the road to wealth.
We have absolute confidence that by joining us in the next stages of your learning and planning program, you will increase your knowledge and ability to be among the 7% of the population who plan the road to independent wealth.