Top tips for investors

General tips for investment property owners.

When a residential real estate tenancy agreement expires, it is a great opportunity to increase the rent and improve your cash flow. But is it always wise to increase rents? – and by how much?

Rents have been going up as a result of strong demand for rental properties, due to vacancy rates being at an all time low.

To determine the market rental for your property, you need to factor in the rate of inflation, and you need to find out the rent being charged for comparable properties that have recently been rented.

The best way to determine the market rental is to rely on the advice of your property manager, who can tell you the market rental for your property. Professional property managers can refer to their rent roll, data from sources such as the real estate institute in your state, and monitor local advertising.

A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you an idea of the net return before tax.

Routine inspections should be carried out every three months. Regular inspections should be completed by the real estate so that the owner can be kept up to date on the condition of the property.

Extensive inspections of investment properties should be carried out every 1 – 3 years. Don’t be put off by the economic cycle. If you find the right property, buy it. Even in the worst recession, there is always a suburb growing in value and producing good rent.

If you live interstate, and are arranging to inspect your investment property, speak to your accountant, as you may be able to claim travel/accommodation expenses as a deduction.

Remember to revalue your properties every few years, so that you can use your additional equity to negotiate a larger loan which you can reinvest in additional rental property.

“Wealth building through property isn’t an overnight or get rich quick scheme. It’s NOT instantaneous, but with the right factors in place, a base of wealth can be built at quite a rapid pace.

Whatever your age or stage of life, property has both the flexibility and the wealth-building power to deliver an earlier, more secure, or more prosperous retirement.”

Once a property has been purchased, your involvement can be reduced to a minimum through the use of an effective property manager.

Preparation of lease, rent collection, maintenance, property inspections as well as tenant screening are some or all of the area’s in which a manager can give assistance.

A professional property manager is also in a position to obtain credit checks on potential tenants. Being up-to-date with changes to the Residential Tenancies Act a manager is better suited to negotiate on your behalf should the need arise.

A slow and steady strategy can deliver the keys to financial independence.

Accumulating property and building a portfolio is the primary goal of most investors, but overnight success can take years. It’s important to plan for the future and not get so caught up in the process that you could end up failing to act. It’s extremely important to get moving and do something as the cost of doing nothing can be very expensive.

Remember, the ability to earn an income is our most important asset and we should treat our finances like a business. In a business, cash flow is generated by sales and service, while for individuals it usually comes from salary. In order to save, you must spend less than you earn. With discipline and budgeting, financial goals can quickly become reality.

Having a budget helps you take control of your finances and is one of the most useful tools for planning. It gives you a clear picture of where your money goes and more importantly, how much you could be putting aside to reach savings goals.

Budgeted investments that are bought using savings can make you rich – investments that generate positive returns while you sleep. Bricks and mortar give you security and peace of mind. Financial independence gives you choices, and above all a feeling of achievement and security.

Success comes to those people who plan for it.

Don’t be afraid of getting advice, but make sure it’s good advice.

ARPP has a panel of advisors for legal, financial planning, accountancy and property selection. Having a support team who are active property investors themselves allows a more balanced and objective view on property investing.

Don’t be afraid to purchase when the market is either up or down.

Investors should take a long-term view as investment in residential property is not a get rich quick scheme.

Sometimes the hardest move for a new investor is simply taking that first step.

It’s important to remember that not all landlord protection policies are the same.

Some, for instance, are designed to be taken out in addition to a typical home and contents or strata title policy, while others are more comprehensive.

Some policies allow you to take out cover for the contents of the property. This is particularly important if you rent out a partially or fully furnished property.

Whatever your circumstances, a good property manager should ensure that you have adequate insurance cover.

Property management fees.

If you have a property manager looking after your property, you should receive regular income/expense statements from them. Statements are normally sent every month with an annual statement sent at the end of the financial year.

Be sure to claim all their costs, such as management fees, postage, stationary, letting expenses, lease renewal expenses and inspection charges.

You will find that if you have a good property manager taking care of your property, all of their charges will total approximately 10 per cent of your rent.

Travel and car expenses – keep good records.

Any use of your car, whether it be for the collection of rent, inspection of property and/or maintenance of the property should be recorded.

It is very important for investors to maintain these records then consult with their accountant regarding claiming for travel expenses.

If investors are contemplating purchasing investment property interstate, remember that you can’t claim all your expenses if personal travel is involved.

For example, a week spent on the Gold Coast where you have one investment property, does not mean that you will be able to claim the full week’s expenses, including all travel and accommodation costs. You can certainly claim some of your costs but they need to be realistic.

Once again, it’s important to consult your accountant.

Rental Return.

While investors can be reluctant to ask for a higher rate of rent and risk increased vacancies, it’s essential to review your rental return at the end of each term.

However, it’s unwise for investors to expect tenants to pay far beyond what is fair and reasonable.

At the end of the day, you’ll end up with a property that sits vacant for an extensive amount of time and could end up robbing yourself of the rental income that could help sustain your loan.

Capital growth should remain the number one objective in order to truly achieve financial independence using housing as an investment vehicle.

In all types of economic climates – remember, property is a long-term investment.

Repairs and maintenance.

There is one thing that you need to be very clear about … and that is the difference between a repair and an improvement.

One can be fully claimed in the year that the expense was incurred, the other cannot.

Stationery and postage.

If you communicate with your tenant via mail, be sure to claim the cost of stamps, envelopes, registered mail, etc. Be sure to keep all receipts.

Remember, it’s important to consult your accountant regarding expenses to confirm if they are claimable or not.

Quality record management is of the utmost importance and can be broken down into three distinct areas: income, expenses and depreciation.

Income.

A good property manager will provide a concise summary of rental payments received over the last financial year.

Investors should ensure all rental payments have been accounted for and that rental income amounts correspond with bank statements.

Expenses.

Expenses often involve a wide variety of items. A detailed list should be included as part of an investment property claim. It is important to ensure all claimable expenses are included as part of the end of year assessment on the property in order to obtain the maximum allowable tax benefit.

Depreciation.

Depreciation refers to normal ‘wear and tear’ to the asset, capital works and other depreciable items such as fixtures, fittings and appliances.

The depreciation schedule is one of the most important documents relating to an investment property. For investors it is advisable to engage a quantity surveyor before the property is leased, in order to have a complete and accurate depreciation schedule in place.

If the property was purchased in the latest financial year, the tax office will require details of the property including the purchase date, settlement date and purchase price. Other purchase documentation will include paperwork relating to the mortgage (borrowing and set up costs of the loan, stamp duty on the mortgage and government charges) and the date the property was made available for rent.

The end of financial year is a good time to update the value of your investment property/properties. Checking on the amount of equity available within your property investments will give you an indication of potential for additional property investment in the year ahead.

Once you decide to purchase an investment property you need to find a good rental manager with a proven track record. A good way to achieve this is through referral from someone with experience and knowledge of the local market.

They’ll generally charge about 7 to 9 percent of gross rent to screen potential tenants, collect rent and organise maintenance. They’ll also carry out regular inspections.

Finally, make sure you have the appropriate insurance in place. You should also consider landlord protection insurance as well as building insurance.

A good rental manager will be able to assist with this.

The choosing of an investment property location is particularly important because it will have to appeal to a range of potential tenants.

Be sure to leave your emotions at the door and only buy in a growth area.

Transport, schools and shopping centres are just some of the amenities that will contribute to capital growth potential. (see our website for 20 point property criteria)

Your budget is the first consideration of your investment.

How much can you comfortably afford to spend on an investment property?

Income, lifestyle, available deposit and your borrowing capacity are all things that you need to consider. It’s important to factor in all of your purchase costs.

These can include loan establishment fees, valuation fees, conveyancing, stamp duty and insurances.

• Rather than getting one big tax return at the end of the financial year, consider applying for a 15-15 Variation so that you have less tax taken out of each pay packet throughout the year. With negatively-geared properties this can improve cash flow.
•  Choose a property that will have the highest potential for capital growth and allow time for compounding to happen. More often than not it’s the waiting that is the hardest part.
•  Remember, the property cycle is on average 7-10 years and the savy investor knows that the most opportune time to invest is during a lull, not during a boom when prices are at a premium.

It’s important to remember that not all landlord protection policies are the same. Some, for instance, are designed to be taken out in addition to a typical home and contents or strata title policy, while others are more comprehensive.

Some policies allow you to take out cover for the contents of the property. This is particularly important if you rent out a partially or fully furnished property. A good property manager should ensure that you have adequate insurance cover.

Disclaimer: Please note that the above information is a guide only. We always recommend that you speak to your accountant regarding expenses, taxation and your individual circumstances.