Let’s just clear the air on this one before I go on; I don’t actually own a first home so everything contained in this article is purely theoretical. I look forward to the day when I can think about investment properties (having my own car/ buying expensive cheeses) but at the moment, even first home deposits still feel like a grown-up dream.
Should you be thinking of investing your hard-earned moula in a second property?
According to Digirati Life, housing turned in an annualized return of 8.6% between 1978 and 2004. Compared to the 13.4% return of stocks, investment properties do earn less for the investor. At the same time, they are usually less risky than the stockmarket.
To qualify for negative gearing and all other manner of goodies, you’ll need to rent it out. That’s right- some pack of smoking, drinking and partying bohemians might be about to descend upon your beautiful abode. You remember what you used to do when you were renting; wall-climbing competitions and races down banisters. Karma is about to kick you where it hurts.
So is it worth renting out your second property to qualify for the tax benefits? Obviously, the best person to ask is a financial advisor who can give you some advice that is tailored to your situation. Here are a couple of take-home points to consider.
Rental markets go up
As someone who rents, I know full well that rental prices do not go down. In the current climate (especially if you are somewhere like Sydney or Melbourne), rents increase dramatically all the time and getting a place to live is difficult. You’re looking at an investment with a consistently ready audience.
Who doesn’t love tax benefits?
Whether it’s negative gearing or just claiming the tax on repairs and maintenance, the government has set things up so investment properties benefit at tax time. You could end up saving yourself a pretty penny, especially if you invest in an excellent accountant who knows all there is to know about tax benefits.
Understand your own finances
Rental properties are not always snapped up immediately, so you must be financially prepared to carry the financial burden for a couple of months or between tenants. Understand how much your basic expenses will be, and be assured that you can cover them.
According to Digerati Life, the one essential mantra for all people considering rental property investment is: if your rental property does not produce a positive cash flow, you could essentially go broke by attempting to become a landlord. This is basically the Micawber Principal in an another setting. If the amount of money made from the property is more than the amount you spend on it, the result it happiness. If the situation is reversed, the result is misery.
Once you have made your decision, here are a couple of pointers as to choosing a tenant:
- People with pay slips that prove they are employed are generally a good bet to make the rent on time.
- Should the potential tenant espouse a belief in anti-materialistic anarchy, terrorism or commune-based living, perhaps reconsider offering them the house.
- Installation artists are cool cats, but prepare to have your house ‘revamped’ should you accept their application.
Do you have a rental property?
What do you consider the pros and cons?