Building a property portfolio
Property has long been considered one of the more secure investments, and certainly the desire to own one’s home continues as one of the great Australian dreams.
Yet, more frequently, people are purchasing properties in addition to their primary residence as a means of growing their wealth. The good news is that there are also other advantages to building a property portfolio, these include.
Less volatility
Property is generally seen as a more stable investment option than shares or other investments. However, it should be noted that long-term research has shown the returns to be similar.
Tax benefits
If you have borrowed to purchase the property, the interest on the loan is tax deductible. Other tax deductions can include repairs, depreciation of assets (the building itself and items such as carpets, blinds, ovens, cooktops and hot water units), rates and many other costs associated with owning and maintaining the rental property.
Income loss
When the property costs are higher than the rental income received, the Australian Taxation Office (ATO) allows investors to offset the loss against other income.
Security
With an ever increasing population, housing is always in demand. Recent vacancy rates have been as low as 1.1 per cent and 1.7 per cent in Sydney and Melbourne respectively.
The following is an example of how a property investment may be used to build wealth and minimise tax.
Assumptions
| Investment property purchase price | $700,000 |
| Investor to borrow Loan interest rate Investor’s marginal tax rate Projected rental income Assumed asset depreciation Assumed building depreciation No land tax payable |
90% 6.66% pa 46.5% 4% pa $5,000 $4,000 |
Calculation
| Property purchase price Stamp duty Legal fees |
$700,000 $26,990 $1,500 | |
| Total cost of property | $728,490 | |
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| Loan required (90%) | $630,000 | |
| Deposit required (10%) + stamp duty and legal fees |
|
$98,490 |
| Total funds | $728,490 | |
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| Annual cash flow |
| |
| Rental income received (4% pa) | $28,000 | |
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| Less expenses |
| |
| Loan interest ($630,000 x 6.66% pa) | -$41,958 | |
| Agent’s commission | -$1,960 | |
| Council rates | -$1,200 | |
| Water rates | -$1,000 | |
| Strata levies | -$3,000 | |
| Repairs | -$1,000 | |
| Total expenses | -$50,118 | |
| Net rent | -$22,118 | |
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Asset depreciation |
-$5,000 | |
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|
-$31,118 | |
| Add back tax saving @ 46.5% | $14,469 |
Net cashflow required ($22,118 - $14,469) = $7,649 pa
Outcome: The net after-tax cost of the property is approximately $147 per week.
There are significant opportunities in purchasing residential investment property. However, there are disadvantages that should also be considered, such as the inability to quickly liquidate, the need for large capital amounts for deposits, rising interest rates and potential land tax.
Please refer to the audio segment on our website titled “Opportunities in buying residential investment property” (RACS: Surgical News 10th Edition dated July 2011).
http://www.bongiorno.net.au/resources/audio
Your Bongiorno adviser can help you to decide if this is an investment option for you.
As this general advice has been prepared without taking account of your objectives, financial situation or needs, you should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product Disclosure Statement before deciding to acquire the product.
Sources
www.realestateview.com.au Australian renters still feeling the squeeze (Nov 2011)
www.moneybuddy.com.au Home loans guide - investment properties (Jan 2012)
www.moneysmart.gov.au Pros and cons of property investment (last updated Nov 2011)