Australians have grown to love ‘bricks and mortar’. Understandably, owning property is an aspiration for many and people often commence their property journey by wishing to own a property outright (with no debt owed to a bank).
The past 20 years have seen a steep rise in people striving to buy and own investment properties.
By definition, an investment property is a property you own but do not reside in. Instead, you receive income (rent) from a tenant who lives there.
More and more, people are electing to borrow money to fund the purchase of a property that they rent out rather than living in. This might be a first step to entering the property market such as when buyers still reside at home with their parents, or the purchase may be in addition to having an owner-occupied property.
The rental income received by the owner of the property (landlord) is taxable, however, this rent can be offset by some of the costs associated with owning the investment property. Whilst we would encourage you to speak further to your tax agent on this, generally speaking, expenses such as insurance, rates and rental property management fees can all be claimed as a tax deduction.
A big attraction in purchasing an investment property is that the interest payable on the loan associated with the investment property can also be tax-deductible.
When considering buying an investment property, it’s important to weigh up the income receivable with the expenses associated with owning a property. This is something we do regularly for our clients. Depending upon your life position, you may be able to fund the investment property costs from your cash flow.
For those fortunate enough to own multiple investment properties, it may be possible to either partly or wholly live off the rental income received from your investment properties. This can take years to achieve as investment property values increase over time, the debt owed against the investment properties reduces, and the rental income received rises.
As financial planners, one of the things we discuss with our clients is whether holding investment properties into retirement is an appropriate strategy for them. There are pros and cons associated and we often explore these in various detailed strategies to figure out the best way forward. For example, if choosing to hold an investment property into retirement we would expect that, over time, the value of properties will rise (called capital growth). This means that the owner of these investment properties will see their overall asset position increase which can help with leaving money behind to beneficiaries.
Owning ‘bricks and mortar is also deemed to be a relatively ‘safe’ investment given the steady rise in property values over the past 20 years. However, it’s important to remember that property values do not always trend upwards, and there are times when property values plateau or reduce in value.
Depending on the ownership of an investment property, any rental income received may be taxable which means that tax is payable for every year of ownership of that investment property. An alternative option could be to sell investment properties before, at or after retirement and place sale proceeds into the superannuation (pension) environment which, dependent upon your circumstances, could mean that you pay 0% tax on the earnings for the rest of your life.
Another consideration around maintaining investment properties into retirement is the level of retirement income needed. This will depend upon your desired retirement lifestyle – i.e., the amount of travel you wish to do. Whilst property will, on average, grow in value over time, this can often come at the expense of having access to retirement income. For example, let’s say money is needed to fund a dream European holiday valued at $50,000. When it’s tied up in an investment property, homeowners can’t simply sell a bathroom to put in the kitty for that big overseas adventure.
Another factor any landlord must consider with an investment property is the ongoing property management and upkeep. It’s reasonable to expect that every five to ten years there will certain expenses associated with maintaining an investment property. Be it costs for new carpet, plumbing, electrical, internal and external painting, roofing expenses etc – these are all relevant expenses that need to be taken into consideration.
In light of all these factors, one can understand why some of our clients, whether retired or otherwise decide that an investment property is not for them. Perhaps they do not have the time and energy to manage it, or they would prefer investment strategies that allow them to access their money more readily.
I’m more than happy to chat to clients and potential clients about whether an investment property is right for them. In my view, the simple lifestyle on offer here combined with beautiful fresh air and such incredible scenery makes Hobart the best city in the world to call home and whether you’re seeking investment in Hobart or anywhere else for that matter, I’d love to help you explore investment options.
At Strategic Invest Blue, we’re dedicated to providing holistic advice to our clients, be it young families, empty nesters or retirees, so that they can live their best possible lives. We welcome you to arrange a complimentary consultation to ascertain how we can be of assistance.
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Nick Tremayne is a Financial Planner with Hobart’s Strategic Invest Blue. He enjoys helping people navigate the complexities of the financial world and finds it fulfilling to bring peace of mind to his clients so that they have more time for the things they love.
Book a chat with us if you would like to speak with one of our other financial advisers.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.