FAQ

We generally find the impact on the lifestyle of our property investors is minimal. There are also strategies available to minimise impact on cash flow, such as fixing the interest rate on the loan, making sure you obtain a competitive interest rate loan, and lodging a tax variation form to increase take home pay.

We can help you with all of these things as well as sourcing a suitable property and organising finance.

There are ways to minimise the cost of holding an investment property.  We have already mentioned the lodgement of a tax variation form. Investors should also have regular rent reviews and have a Quantity Surveyor complete a depreciation schedule.

The importance of having an Accountant who is experienced with property investment cannot be overstated.  An experienced proactive Accountant can maximise the tax benefits of owning an investment property, thereby minimising the holding costs.

Pfeiffer Property is able to recommend Accountants who can provide such a service.

By choosing an experienced, reliable Property Manager.  A good Property Manager has ways of attracting the tenants you want.  They then carry out stringent employment, finance and rental history checks on any prospective tenants, cull the list and then provide you with all the information necessary for you to make an informed decision.  We can recommend Property Managers around Australia who meet these requirements.

If you find interest costs during construction will have an impact on your cash flow, we recommend you establish an additional finance amount to cover this cost during construction. The amount established will depend on your cash flow and the estimated construction time.

Talk to us about how we can help you effectively manage this.

It is normal for rental properties to go through periods of vacancy. To minimise the impact of this:

• It is vital that you purchase investment properties in areas where people want to live (i.e. where there is going to be demand by people who want to rent your property now and in the future).  This will minimise the risk of vacancy.
   
• We carry out research to help you purchase properties in the right locations.  Part of this research looks at vacancy rates.
   
• We suggest when finance is set up for the investment property purchase you include a “buffer” to provide for unforeseen short term vacancies.  We can guide you with what amount is required for this.
   
• We also strongly recommend that as well as building insurance you take out a suitable “landlord” insurance policy.  This will protect you against vacancy as a result of the property being damaged by a tenant.  This type of insurance has a relatively low cost – typically $400 a year.  We can recommend various insurers and obtain quotes for this type of cover.

Up until the 1980’s in Australia we were brought up to believe that all debt was “bad” and we should do all we can to pay off our loans as quickly as possible.  Until then this was probably a wise philosophy because available finance had severe limitations (e.g. shorter term, no interest only lending, low loan to valuation ratio), was heavily regulated and had a much higher cost relative to today’s interest rates and fees.

Today, thanks largely to deregulation and competition we have the availability of much more flexible financial products including residential property finance.

This allows you to structure the finance of an investment property in a much more favourable way.  You may have heard the phrase “good” debt versus “bad” debt.  Well, good debt is that debt which finances an income producing asset (e.g. property, businesses and shares). Interest on this debt is normally tax deductible and the income from the asset can help in meeting the interest repayments.

All other debt is bad debt and should be in the main repaid as soon as possible, because there is no benefit in having it!

This is why most of us should pay interest only on the investment property loan, especially if we have a loan on our own home as well (bad debt).  Any spare funds we have should be used to repay the principal on the home loan.  Another reason we suggest paying interest only on your investment property loan is to minimise the cash outlay you need for the loan.  This frees up your cash to purchase and receive the benefit of another investment property!

We can assist you with the most suitable finance structure.

There are risks involved with any investment, including the risk of reduced value of the investment if you sell.  One of the key factors to successful property investment is minimising this risk.

This is done by purchasing investment property that is the correct type of property in the right area, at the right time in the property cycle.  There is information available providing indicators so we can determine what, when and where to buy to minimise the risk of reduced property value in the future.

Also always remember that this is a slow gradual long term investment.  There will be ups and downs. But all our clients that have stuck with our investment plans have come out ahead.

Affordability for loan repayments on an investment property differs from that of a home loan. One of these differences is that if interest rates increase on an investment property loan you can claim the higher cost as a tax deduction.  Therefore, the higher tax deduction offsets to some extent the higher interest cost.

The other main difference is that in Australia, interest rates increase as the inflation rate increases.  When the inflation rate increases rents go up, so your ability to meet the higher interest rate cost improves.

Nevertheless, if you are concerned about interest rate increases, you should consider fixing the interest rate on all or part of your investment property loan.  Interest rates can be fixed from a period of 1 year up to 5 years (even 10 years with some lenders).

We can advise you on this.

We consider it a “must” when purchasing an investment property to review your individual circumstances should an unexpected event occur causing financial hardship.

Such events may be loss of income due to illness, retrenchment, redundancy or other factors that affect your employment.

You would be very wise to seek advice from a risk specialist who can recommend the most cost effective way to protect your income and your investment and other assets.

Remember, an astute property investor will take steps to minimise risks in all areas.

We can arrange for a specialist to advise you on this.

If you become self-employed you would carry out a financial analysis of the whole business venture, whether you purchase an existing or start a new business.

Part of this analysis would be a cash flow budget.  If you already have an investment property you would of course need to include the ongoing holding costs (including interest repayments) as a budget expense.

The costs of holding an investment property (if the right property is purchased in the right area at the right time) are relatively low.  If the ongoing costs of the investment property are hindering your ability to become self-employed, perhaps you need to reconsider the viability of the business venture.

We can assist you with budgeting for an investment property.

This is where the services of an experienced proactive Property Manager are very important. Such a Property Manager will carry out a detailed internal and external property inspection regularly (normally every 3 months).  They will then provide a report to make you aware of any faults / damages to the property needing rectification.  This ensures the property is well maintained and your investment is protected.

A good Property Manager will also report to you immediately if the tenant requires any property items to be repaired or replaced.

We can recommend experienced professional Property Managers anywhere in Australia.

Up until the 1980’s in Australia we were brought up to believe that all debt was “bad” and we should do all we can to pay off our loans as quickly as possible.  Until then this was probably a wise philosophy because available finance had severe limitations (e.g. shorter term, no interest only lending, low loan to valuation ratio), was heavily regulated and had a much higher cost relative to today’s interest rates and fees.

Today, thanks largely to deregulation and competition we have the availability of much more flexible financial products including residential property finance.

This allows you to structure the finance of an investment property in a much more favourable way.

You may have heard the phrase “good” debt versus “bad” debt.  Well, good debt is that debt which finances an income producing asset (e.g. property, businesses and shares).  Interest on this debt is normally tax deductible and the income from the asset can help in meeting the interest repayments.

All other debt is bad debt and should be in the main repaid as soon as possible, because there is no benefit in having it!  This is why most of us should pay interest only on the investment property loan, especially if we have a loan on our own home as well (bad debt).  Any spare funds we have should be used to repay the principal on the home loan.

Another reason we suggest paying interest only on your investment property loan is to minimise the cash outlay you need for the loan.  This frees up your cash to purchase and receive the benefit of another investment property!

We can assist you with the most suitable finance structure.

13.1.  Not using a specialist team to lead you through the process – property investment adviser, mortgage broker, accountant, conveyancer, property manager and financial adviser

It is vitally important for a property investor to use experienced, reputable and professional advisers. Many investors try to do as much as possible themselves to save costs or engage the cheapest service providers. In most cases this leads to delays and ends up costing the investor much more than if they had used the best team of support specialists.

Such specialists can help the property investor:

• select and purchase the most suitable investment property
• set formal goals that are measurable and have a time frame
• maximise the tax advantages of owning an investment property (e.g. by obtaining a depreciation schedule)
• purchase the property in the most suitable name(s)
• minimise the impact on cash flow (e.g. by lodging a tax variation form)
• establish the most suitable finance structure
• obtain the most suitable tenant and reduce the risk of vacancy
• obtain advice on their overall financial plan for the future

13.2. Making property investment decisions based on emotion rather than logic and research

Common emotional decisions are:

• purchasing property in the local area only. This is based on the belief that it only makes sense to purchase property where “we can keep an eye on it” and “make sure the tenants are looking after the property”. This is an emotionally based decision and in many cases leads to a poor investment.
• so many people purchase an investment property using the same emotion as they would when buying a home to live in, e.g. properties with ocean views, large land holdings in “hobby farm” areas
• spending money and time on colour schemes and other items that do not improve rental return
• purchasing property based on advice from friends and family members rather than using research, logic and specialist advisers
• purchasing an investment property in an area where they go on holidays and where “we would love to retire” or where their son or daughter have somewhere to live when they leave home, e.g. when they go to university
• using logic and research instead will reduce the risks of investing and maximise your chances of successful property investment.

13.3. Purchasing property in regional areas that have strong rental returns

If your goal is to provide for your financial future it is important to purchase properties that have consistent strong capital growth whilst at the same time providing a consistent strong rental return. The continued capital growth provides the asset for your retirement and the consistent rental return allows you to hold the property without significantly affecting your cash flow / lifestyle.

Many novice investors are tempted to purchase property in areas where the rental returns are relatively high. Such properties are usually in regional areas where capital growth is inconsistent and unreliable. Typically they are reliant on one industry to fuel the demand. When that industry suffers a downturn or closes, rental income can plummet, vacancy rates increase and property prices fall.

Examples of this are mining areas and regions largely dependent on one major employer (e.g. an aluminium smelter or a car manufacturer).

13.4. Purchasing incorrect type of property / not diversifying

The choice of property type is very important. Usually a good investment property is one that has low maintenance costs and is attractive to a wide range of tenants that require a long term lease. Common mistakes include purchasing the following types of property:

• older properties because they are cheaper (these have higher maintenance costs)
• home units in seasonal holiday areas (lack of consistent rental income)
• "unique" architecturally designed houses (higher building costs and fewer buyers if property is sold)
• properties that require high maintenance costs (adds to holding costs)
• steeply sloping blocks (higher construction costs)
• home units with very high strata levies (adds to holding costs)

Another mistake is purchasing all investment properties in the same geographical area. When investing, diversification is an important consideration. A geographical spread of properties will reduce risk and allow the investor to take advantage of various property markets in different stages of their growth cycles.

13.5. Setting up finance incorrectly

The most common mistake here is to have all loans (including an investor’s own home loan) with the same lender. This increases risk by:

• Not having the best loan available
• "Cross collateralisation" i.e. all properties owned by the investor securing all their loans. This increases the risk of forced sale of the family home if there is a default on any investment property loan
• Having one lender controlling all properties owned by the investor
• Severely restricting the purchase of additional properties, especially if the lender has restrictive borrowing policies
• Adding to costs involved and complexity with additional borrowings, e.g. if additional loan required, all properties need to be revalued.

Other common finance mistakes include paying principal and interest on the investment property loan – any available cash should be used to reduce personal debt.

13.6. Not setting goals

This is another vital component of the investment property process. Many people purchase a property merely because they think it would be a good idea. They have no formal plan.

At the very least, property investors should have a written plan that has goals which are measurable and have a set time frame.

An independent financial adviser can be an additional valuable resource with an overall plan.

13.7. Procrastinating and not doing anything at all!

Think about the facts - if you do nothing:

• Could you live on $400 a week in retirement?
• Do you have enough saved for 25 years of retired life?
• Will you be able to afford a holiday when you retire?
• Are you working hard just to get by?
• Will you have anything in the future to show for all your hard work now?
• Are you getting ahead?
• How are you going to manage when your income more than halves in retirement?
• Do you want to rely on government hand-outs to live on in retirement?