Beginner's guide to investing

Property investment is one of the most popular forms of investment in Western Australia and has the possibility to reap many long-term financial benefits for investors.

Here are three of the top reasons so many West Australians choose to invest in property.

1. It can help set you up financially

Historically, capital growth is a major benefit of property investment and with time and patience, can significantly increase your personal value. The value of your property will almost certainly grow over time. If your rental income is greater than your expenses, then your investment property can be another source of income.

2. It’s one of the safest investment options

Despite the many other investment alternatives, stocks, bonds, cash etc, investing in property is generally regarded as the safest due to its low volatility. Property also gives you an immediate return on your investment through positive cash flow, so you can start receiving income almost straight away. Because your investment is a physical asset, you can also mitigate risk by having it insured and unlike other investments, you can influence your returns.

3. There are tax benefits

Although tax benefits should not be used as a decision-making factor, it can be a benefit of investing in property. Any tax associated with the expenses paid on the investment property, such as property maintenance, council rates and property manager fees can be claimed back at the end of the financial year. Plus, if your expenses exceed your rental income, this may also provide tax benefits such as negative gearing.

These are just a few benefits to property investment, however like any business, it’s wise to explore both the pros and cons. Investing in property can be a good way to grow your assets, however it’s still important to define your investment objectives, do your research and seek professional help if you are unsure about any aspect of the investment.

There are a number of contributing factors that make up a ‘good’ property investment. It is important to look at your investment like a business, so thinking with your head, not your heart will get you the most out of your asset.

If you want to maximise your investment return, here are a few things to consider:

Location, location, location!

It is advised that when looking for an investment property, to think like a tenant. A property in a sought after location will inevitably grow in value. Close proximity to schools, public transport and public facilities is desirable. It's also a good idea to look for areas where significant infrastructure projects are planned.

When doing your research, it is valuable to think outside the box. Chances are if you are reading about a ‘boom suburb’ then it is probably too late to buy in that area. Investors need to use their knowledge to try and predict areas of long-term growth, which is where the advice of a professional buyer's agent could prove invaluable. A buyer's agent will do the research for you and be able to suggest alternatives based on your investment objectives.

To find out more about a suburb you’re interested in, visit reiwa.com’s suburb profiles.

The right property

Your investment objectives will help shape the type of property that you purchase. Are you looking for a property with sub-division potential, a property with a standalone house in good condition or a strata titled property?

You will need to assess how much of your own money you will need to cover expenses. If you need to spend a large amount of money on improving the property and making it attractive, will it get covered by the cash flow produced by the property? And will it lead to higher rental returns and better capital gains? You need to tackle any planned renovations with an investment strategy to ensure you are not just throwing away your cash.

With the Perth property market starting to show signs of recovery and stabilisation, buyer confidence means competition could increase, so you may find yourself having to act fast to secure your ideal property.

Always base your decision on facts and research and tackle your investment like you would any other major business decision.

A buyer’s agent is a real estate professional hired by the buyer to research and negotiate the purchase of a home on behalf of the buyer. The buyer’s agent represents the interest of the buyer and acts on behalf of them during the transaction process.

You might be reluctant to utilise a buyer’s agent, especially in what is already a pricey process.

But here is how a buyer’s agent can help you find the best deal for your investment property:

• A good buyer’s agent will undertake substantial research before choosing a property to buy for their client, assessing yields, rents, affordability, suburb infrastructure, growth history and much more. If you think you know the property market well, these are the professionals who are dealing with it every day.
• They can help take the emotional baggage out of investing and make it less stressful. You are less likely to make a mistake or miss an opportunity if you have a buyer’s agent assisting you.
• They are strong negotiators and have your best interests in mind and are therefore going to try and get you the best possible deal.
• They can use their knowledge and property expertise to protect you from being misled by selling agents or vendors.
• They can pass on their knowledge and investment methods onto you during the process, so you can broaden your skills and use those tactics for when you invest in your next property.

To be a successful property investor you need time in the industry in order to develop your portfolio and acquire the appropriate experience. So, when starting out, it makes sense to hire a buyer’s agent as not only will they find you the best possible asset to suit your investing needs, but you will also learn from the professionals in the industry.

If you'd like to find out more about how a buyer's agent can help you, speak to one of REIWA’s local property experts.

If you are making income off a property, whether your property is negatively or positively geared, there are implications for income tax, capital gains tax (CGT) and goods and services tax (GST). It is important to be aware of the tax your investment property incurs, so when the end of the financial year comes around, you know what you can and cannot claim back.

There are several taxes that property investors incur when acquiring and owning an investment property:

• Income tax - Any income generated from your property (rental returns and any other money) is taxable, but keep in mind this may be offset, by interest repayments on your loan as well as other deductions.
• CGT - When you choose to sell your investment property, the profit you make on the sale is considered “capital gain” which is taxable. The applicable rate of CGT is the same as the income tax rate which you pay, however if you owned the property for more than 12 months, you gain 50 per cent discount on the capital gain at tax time. This gives investors a good incentive to own the property long-term.
• Property tax - Also more commonly known as “council rates”, this is the tax that funds local government investment and expenditure such as community maintenance and services. The amount of tax will depend on the local government and market value of the property.
• Land tax - Land tax is payable on all property you own, except the property in which you reside in. Land tax is based on the combined unimproved value of the land you own and is calculated on what your land would be worth if it was vacant and does not include dwellings on the property. This annual tax varies depending on your local municipality.

What you can claim?

• Council and water rates
• Repairs and maintenance
• Insurance
• Advertising for tenants
• Real estate agent fees
• Interest on your investment loan
• Depreciation on assets like fixtures and fittings

Negative gearing

Negative gearing occurs when the annual cost of your investment is greater than the return which you are receiving. The difference, which represents a loss, can normally be offset against your other income like salary and wages.

So, say your income is $60,000 a year but your property expenses are $15,000 a year, you’ll only need to pay income tax on $45,000.

The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial.

But be careful, although negative gearing is an attractive benefit to investors, it is still a loss that needs to be funded.

If your investment property is positively geared, this means you are making a profit off the property with the rental returns outweighing the costs, but you can expect to pay tax on the property’s annual profit.

When investing in property, one important consideration to keep in mind is the suburb’s growth potential. A good investment property should increase in value over a period of time. For an understanding of how the suburb you’re looking to invest in performs, it’s a good idea to find out its annual growth rate as well as how it’s performed over a longer period of time.

For more information on a suburb you're looking into, visit the insights page on www.reiwa.com.  

Rental yields are a measure of how much rental income an asset is generating, as a percentage of the property's value. The rental yield is useful for indicating the potential return of an investment property. The higher the rental yield the better the annual returns are for investors.

For example, if your rental property had a median weekly rent price of price of $359 per week and the amount you purchased the house for was $512,500, this means you would be generating a 3.6 per cent average annual return on the purchase price of the property.

You can easily calculate the gross rental yield for your suburb. For example, if the median rent is $450 per week, multiply it by 52 to find the annual rent. In this case the annual rent is $23,400. If your suburb’s median price is $500,000, the gross rental yield is 4.68 per cent ($23,400 / $500,000 x 100).  

When purchasing an investment property, you need to think like a tenant.

What you value and look for in a property as an investor may not necessarily be what tenants are looking for. The kind of tenant and demographic you target will largely depend on the location you buy in.

For example, if you invest in an apartment in the city, your target tenant is likely to be a young professional. What they are looking for in a rental property is going to be different than what a family looking for a rental in Perth’s outer suburbs are searching for.

Despite this, there are some key attributes to look for in an investment property that will help your rental stand out to tenants.

• Location, location, location – ensure the property you purchase is close to amenities and good transport options. Tenants value convenience in a lifestyle, so it’s important your investment property is smartly situated.
• Parking – While WA’s transport system has improved over the last decade, the majority of West Australians still rely heavily on a car. As a result of this, tenants look favourably on rental properties that have designated parking options. While in Perth’s suburbs, garages are a very common attribute in most homes, in the city, parking can be limited, so if you can find a property that provides tenants with a secure place to park you’re already ahead of the game.
• Alfresco living – Warm, sunny weather is a pillar of WA’s attractive lifestyle, so your investment property will appeal to a wider variety of tenants if an outdoor area like a balcony, courtyard or alfresco is on offer.
• Airconditioning – The flip side to WA’s climate is that it can be uncomfortably hot during the summer if you don’t have airconditioning. Be sure the home you purchase has airconditioning and if it doesn’t, be open to looking into having it installed. For many tenants, airconditioning is a deal breaker, so it’s worth it in the long run to ensure your investment property can handle the heat.
• Good quality fixtures and appliances – It’s beneficial to ensure the investment property you purchase has good quality fixtures and appliances. Tenants want to be able to use these features of the home with ease and are more likely to be loyal, long-lasting tenants if they can rely on the fixtures and appliances working in the home. If they are unreliable and constantly requiring maintenance, you may struggle to attract and keep good tenants.

One the smartest decision you can make as an investor is hiring a property manager to professionally manage your property

Currently in WA, approximately 60 per cent of investment properties are managed professionally. While this is a large portion, that still means 40 per cent are self-managed, which is very risky.

A property manager is responsible for ensuring all the daily tasks of managing your investment property are taken care of, acting as a conduit between you and the tenant.

The key responsibilities of a property manager are:

• advertise for and select a tenant
• negotiate rents and prepare lease agreements
• collect rent and other costs
• lodge bonds
• inform you of any required repairs
• conduct inspections
• negotiate rent reviews
• liaise with tenants
• control the termination of a tenancy

Property managers are also skilled at understanding the market rate for the property and setting the weekly rent accordingly. Many private owners tend to misjudge this or feel uncomfortable reviewing the rent with renewed leases for existing tenants.

Owning a rental property and leasing it out to tenants comes with a lot of responsibilities.

All of these responsibilities are outlined in the Residential Tenancies Act, which is a legally binding document you and the tenant sign at the start of a lease agreement.

These responsibilities include ensuring;

• Urgent repairs and maintenance are carried out by a suitable repairer as soon as practicable.
• Minimum standards of security are provided and maintained at the premises.
• The premises comply with the Building Amendment Regulations 2009 for smoke alarms and have at least two RCDs fitted to protect the power point and lighting final sub-circuits to comply with the Electricity Regulations 1947.

It’s important you stay on top of your responsibilities to ensure the tenancy runs smoothly and that you don’t encounter any complications. A property manager can make a big difference to your investment experience in this regard as they oversee these responsibilities so nothing slips past you.

If you do hire a REIWA property manager to look after your investment, you will sign an Exclusive Management Authority for Residential Premises document, which authorises the property manager to carry out the duties and obligations on your behalf.

Along with outlining the costs of the property manager’s services, this document also explicitly defines the landlords responsibilities, which following signing of this document by both parties, are transferred to the property manager to oversee.

For more information about a landlord’s rights and responsibilities, visit the Department of Mines, Industry Regulation and Safety.