Source: Melbourne Investor Feb/March 2007

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Property v's Finance

Source: Melbourne Investor Feb/March 2007

Written by Nathan Stewart

The Nap Group

Nathan Stewart, Managing Director of The NAP Group, founded the company in  Adelaide in 2000. For the past 7 years he has successfully led The NAP Group, expanding nationally. The company specialises in lending and property investments.

 

Property v's Finance

Property investment is a vehicle that has made many people wealthy, yet the role of finance acquisition in regards to property purchase is often misunderstood or to some people incomprehensible. There are several loan types available that allow for greater cash flow for other property purchases and it is extremely important to have a basic understanding of the role finance acquisition plays; its set-up can potentially make or break an investment. Following is a series of terms everyone should familiarise themselves with.

LVR

LVR stands for Lend to Value Ratio. This indicates the amount of funds borrowed against the valuation of the property. In regards to an investment property, the higher the LVR the better. This is because minimizing the amount of initial capital required per property allows for the disbursement and leveraging of capital in order to have multiple properties.

Tax relief

Property investment is most importantly beneficial in two cases: tax relief and the overall capital improved value. All income earners benefit from a negatively geared property, but if the purchaser of the investment property is a high-income earner, and therefore in a high tax-paying category, property investment may hold the key to claiming the majority of the taxes paid. A tax rebate may also be set-up with the tax department so that the initial earnings from the purchaser’s salary are not tax deductible. A big portion of the interest repayments as well as the depreciation and maintenance costs related to the investment property are also tax deductible. The choice of the investment property, its rental returns and the loan product choice all affect the tax benefits that may be drawn from an investment property. The Australian tax system allows for approx 230 items that may be claimed against an investment property. Go to the ATO website (www.ato.gov.au) for further details.

Purchase price

Purchase price and therefore the quality of an investment property has to be analysed on the basis of its rental return, depreciation schedule, ability to acquire finance, uniqueness of stock, location, size, views, design, quality of finishes and the X-factors such as future contextual developments or infrastructure establishment among other things.

Stamp duty

Stamp Duty is a tax component charged by the government generally as a percentage of the purchase price. It is applicable to established properties and vacant land. Stamp duty benefits vary from state to state. It is important that this amount is taken into consideration when deciding the type of property being purchased.

Rental return

A rental return of around 5.5 per cent to 6.5 per cent of its value is generally deemed a good property to hold. The ability to always have a good tenant who pays on time is more beneficial than one who is charged more but never pays. At the initial calculation stages, it is also important to remember that if the property is not neutrally geared then, over a short period of time (depending on the market trends), and as the interest portion reduces and the rental rates increase, the property will soon become neutral or positively geared.

Interest rate

The loan interest repayments are the major part of the holding costs of the property. There are many options with interest rates: Fixed or Variable, Principal and interest or interest only repayments. The choice of whether repayments are made monthly or fortnightly can affect the loan term by a number of years. In general when owning an investment property an interest only term for approximately 10 years is the most beneficial. This helps in freeing up the cash flow to reduce non-taxable debt such as the mortgage of the place of residence.

There are many considerations to take into account when looking at the purchase of an investment property. We have covered some of the fundamentals here, but this is just the start. It is important to do your due diligence and know your terms to extract the best investment deal for yourself.