Answering some FAQs on our favourite topics: real estate investments, SMSF investment property loans, gearing, and more!
Late last year we provided answers to some of our frequently asked investment property related questions. Since then, we’ve had some more questions from clients and followers that we thought we’d share answers to.
Whether you’re new or experienced within the real estate investment game, we hope that these FAQs and answers can give your more clarity on how you can best manage your investments.
Q: What’s the difference between a negatively geared and positively geared investment property?
A negatively geared investment property is one that generates less income than the costs that are paid to operate it. Simply, a negatively geared investment property operates at a loss each year.
With a negatively geared property, you may be able to reduce the annual tax that you pay on the salary produced from your rental property. While negative gearing puts you at a loss, it’s a great strategy if you want to hold onto the property to produce long-term capital gains.
A positively geared real estate investment strategy is one where the annual rental income is higher than the costs to operate it. Unlike a negatively geared investment property, any extra income is taxable. It’s a great strategy for those wanting avoid risk and generate consistent returns.
To understand whether a negatively geared or positively geared investment property will benefit you, from a long-term perspective, we recommend consulting a financial planner or one of our Property Investment Specialists.
Q: Can you use your SMSF to buy an investment property?
Yes, you can use your Self-Managed Super Fund (or SMSF) to purchase an investment property. An SMSF investment property loan allows for trustees to borrow against their SMSF to invest in real estate. However, certain conditions must be met; for instance, you need to separate funds from personal and business-related affairs. When buying real estate through SMSF, the ownership of the property will be held in a custodian trust until the loan is fully repaid.
To learn more about the benefits of using an SMSF investment property loan to purchase property, check out this article.
Q: How can I buy an investment property if I’m self-employed?
There are a few extra hurdles to face if you’re self-employed and applying for an investment property loan. Though, at REIF we’re doing our best to help as many self-employed investors as possible with buying an investment property.
To help you improve your chances of securing an investment property loan, when self-employed, you should:
Prove your ability to save
Keep a paper trail – especially with tax returns, balance sheets, and your profit and loss statements (over a 12-month period)
Be upfront with your potential lender
Pay off outstanding debts and credit cards
Have a war chest
Have a decent credit score
Q: What factors influence house prices?
There are several factors which can influence house prices. When buying an investment property, here are some factors that you should consider:
The size of the property and the number of rooms it has
The fixtures and fittings within the property
The age and condition of the property
It’s location and accessibility to local amenities
Market conditions and economic factors
Ease of access to the property
Local council zoning and council building restrictions
Recent sale prices
Renovation potential
Q: Should I invest in residential or commercial real estate
When determining your real estate investment strategy, it’s important to understand what will benefit you and your individual circumstances. While we always recommend consulting an expert to assess your situation, here are some reasons why people choose to invest in residential and commercial real estate.
Rental yield perspective – when buying an investment property that’s commercial, investors can generally expect a higher rental yield. Commercial properties come with an average rental yield of five to 12 per cent. The average for a residential property is between three to four per cent.
Exposure to risk – residential real estate comes with (generally) a lower risk exposure. At the end of the day, people will always need a place to live and in the current market, rental properties are in high demand.
Investment property loan – acquiring a loan for a commercial property is generally more difficult than a residential one. The bigger the investment, the bigger the banks deem it a risk.
To learn more about the differences between buying an investment property that’s residential and commercial, check out this earlier article we wrote.
Other Questions?
Real estate investing is a long game. It's ideal to have a supportive team with a diverse range of expertise to assist you on your journey. To book an appointment with a specialist, click the button below. We're always happy to help!
