Currently over 1.8 million Australians own an investment property and one of the main reasons is for the tax benefits they provide! An investment property is a real estate property which is purchased for the purpose of earning an income through the property in a range of ways which may include through renters or through resale of the property in the future.
Buying a commercial or residential property as an investment property is an exciting time – although to make the most of it it is important to understand the ins and outs of an investment property to make the most of tax benefits and other benefits available.
Benefits Of Making Investments In Properties
There are many benefits of investment properties with the main benefit being tax related. Many property-related expenses are tax deductible, which may include maintenance costs or fees paid on your residential or commercial loans.
Some key benefits of investment properties include:
– Rental Income
– Capital growth
– Tax advantages
– Negative Gearing
Having rental income from your tenants is a great way to ensure you have a regular income which is beneficial for cashflow. Landlords can claim a variety of costs including property maintenance costs, council rates, pest control, garden maintenance, agent fees, strata fees, land tax, advertising costs to find a tenant and more.
The main tax benefits and advantages which come with owning an investment property which is a rental property is that you can offset any losses on the rental property against your assessable income. It is possible to pay less tax overtime if the income you receive from the property is less than the expenses associated with owning the property as these costs will be deducted from the owner’s income.
Negative gearing is something to take into consideration when you have an investment property. Negative gearing refers to when the income from the property is less than the rental return, interest, or other related property costs. This can reduce your overall taxable income, meaning that you are reducing the amount of tax you may need to pay – overall saving money in the long run.
Claiming for depreciation on a negatively geared property can result in an improved tax position. This is due to when you claim for depreciation this can increase the overall loss of the investment property which can then be claimed as a tax deduction against personal income. Due to this, there will be a decrease in the investors tax liability and lead to a higher tax refund.
Reach out to the friendly team at Greenline Home Loans who can assist you with commercial property loans, accessing the best home loans, or a construction loan where the real estate property can then be used as an investment property for you to reap the benefits for.
Top 3 Mistakes To Avoid When Investing In Properties
To get the most out of your investment property it is best to understand your goals and financial situation. Here are some tips for 3 mistakes to avoid when considering an investment property:
1. Not conducting enough research
It is important to carry out sufficient research before acquiring a loan or buying a property which you are intending on becoming an investment property. It is important to research the location of the property you are wanting, the possible zoning requirements in the area you are interested in, the needs and requirements of possible tenants for your property, the condition of the property and more.
Ensuring you have undertaken sufficient research will ensure that you are well-informed about the property you are building or buying and are able to make the decisions based on factual evidence.
2. Not having a plan or strategy in place
It is always beneficial to have a plan or strategy in place regarding your investment property. Real estate can appreciate in value, although time is needed for this to happen. Generally, the longer you are in the market, the higher your capital gains will be. Therefore, it is important to set a plan for if you are planning to invest long-term.
3. Not calculating finances effectively
It is important to ensure the property you are building, or buying is a good financial decision for you long-term. Ensuring you can afford the payments required and maintenance costs by setting aside money or creating an emergency fund can limit financial hardship which may occur.
Speak to the friendly team at Greenline Home Loans who are able to assist with commercial property loans, the best home loans available or construction loans to begin with when you are considering an investment property.
Reach out to Greenline Home Loans today!
If you have been considering buying your first home, buying a residential property or wanting an interest-only residential home loan, get in touch with our team of experienced brokers at Greenline Home Loans. We have access to 50 lenders and a strong relationship with several major banks to assist you and offer a solution to suit your needs.
At Greenline Home Loans, we will tailor the best solution for your needs and walk with you hand in hand from the first day you consider a construction loan or small business loan. Contact our friendly team of brokers to speak about low-rate home loans on 1800 705 505 to get started today!
Interest-only residential home loans are residential mortgages where your monthly repayments are composed of only the interest that is charged by your lender.
They vary in difference compared to the traditional amortising loans, where monthly repayments are made up of both principal and interest. When both the principal and interest are paid, your loan balance is reduced during your loan term. Since interest is determined by the outstanding balance of your residential home loan, the specified amount of interest that you will be expected to pay will, in turn, also reduce.
On the other hand, when it comes to an interest-only loan, your loan balance during your loan term will not reduce due to the fact that your repayments will only cover the interest on the amount you have borrowed. Your loan balance is not reducing, and hence you will end up paying an increased amount of interest over the period of your loan.
If you are unsure if interest-only residential property loans are the right fit for you, we have outlined a few of the benefits that come along with an interest-only residential loan.
Very Suitable For Construction Loans & Valued-Added Projects
In the instance that an investor is constructing a property, there is a requirement to try and preserve as much cash as you can during the construction phase of the project. Correspondingly, a general construction loan contains a pre-funded interest reserve account from which interest-only repayments are withdrawn whilst the property is under construction. When the property has been built and has been tenanted, the payments of your loan change from interest-only to principal and interest in order to line up with the property’s enhanced income.
This notion is very similar when it comes to value-added projects. Investors have elevated upfront costs to renovate a property, and there is a necessity to utilise their capital for this purpose. Obtaining an interest-only loan is very beneficial for an investor as they are able to conserve their capital until the renovations are completed, and the property is capable enough to produce enough income to gradually write off the initial cost of the loan.
Stabilises & Advances Your Cash Flow
Prospering property investment is all about cash flow. Utilising an interest-only loan can enable you to be more in control of your cash flow over the period of your loan term. To make the most out of the compounding and leverage of your investment property, you need to hold your investment properties for an extended amount of time. Therefore, the only way to do this is by creating financial buffers or cash flow.
Interest-only home loan repayments allow you to pay the merest amount demanded by your loan. This then provides you with extra money in your pocket to pay for any added expenses such as council rates or repairs.
Allows You To Prioritise Your Debt Allocation
Interest-only loans for the purchasing of residential properties are very beneficial as it provides you with the ability to pay off your debt. Interest-only repayments indicate that you are servicing your loan whilst your property advances in value. Furthermore, these interest-only repayments are also deductible from your income, ultimately reducing your tax.
In the meantime, with an interest-only residential loan, you have the ability to pay off any non-deductible debt, such as your credit cards or your car. Paying these debts off should be a priority.
Use Of Offset Accounts Reduce Your Interest-Only Repayments Even Further
An offset account is a simple transaction account that enables you to utilise your surplus cash in order to offset against the interest applicable to your loan. They work by providing you with the ability to transfer any additional savings that you have into an account that is then linked towards your mortgage. This extra cash is used to counteract your mortgage and hence minimises your interest repayment amount.
Proves To Be Very Tax Effective
In Australia, it is acceptable for all investors to claim back any costs that are linked with owning assets, and this does involve interest on residential investment property loans. In regards to property investors, the interest element of their residential property loans is added to the annual costs of retaining a real estate investment. Needless to say, this is offset by the income that is obtained through rent.
Making use of interest-only residential home loans makes it effortless to determine what your annual repayments are.
Reach out to Greenline Home Loans today!
If you have been considering buying your first home, buying a residential property or wanting an interest-only residential home loan, get in touch with our team of experienced brokers at Greenline Home Loans. We have access to 50 lenders and a strong relationship with several major banks to assist you and offer a solution to suit your needs.
At Greenline Home Loans, we will tailor the best solution for your needs and walk with you hand in hand from the first day you consider a construction loan or small business loan. Contact our friendly team of brokers to speak about low-rate home loans on 1800 705 505 to get started today!
Over the past year we have had many inquiries from people looking to purchase a house & Land package or complete a knockdown-rebuild on their existing home.
Building your own home is an experience like no other. Having the ability to choose exactly what your home will look like, inside, and out, rather than buying a house designed by someone else, means you get to live in your dream home. But there are a few things to consider, pros and cons, which we thought you should know about.
To begin with, you will need to apply for a construction loan which is different to your standard mortgage loan when buying an established home.
What is a construction home loan?
The construction loan is also known as a progressive Drawn-down loan. The loan is progressively drawn down as required to pay for each stage of the construction.
The loan is typically provided on an interest only basis for the first 12 months, allowing you to manage your cash flow more efficiently during the building stages. Once construction is finalised, the loan typically reverts to Principal and Interest repayments.
How do progress payments work?
Typically, there are 5 stages of the construction process which will trigger the progression of the draw down.
- Slab down or base
The initial portion of the loan, which is designed to cover the ground levelling, plumbing and waterproofing of the foundations. - Frame stage
The portion of the loan which is designed for building the frame of the property. This covers the initial brickwork, windows, roofing and trusses. - Lockup
The portion of the loan which is designed to support the construction of external walls, along with putting in place windows and doors, making the property lockable. - Fixing
The portion of the loan which is designed to support payment for the internal fixtures and fittings. This covers plumbing, electricity, installation of cupboards and external gutters. - Completion
The final portion of the loan which is designed for the conclusion of items that form part of the construction contract, putting in place the finishing touches.
For the purpose of calculating the interest applicable on the loan, the repayments are calculated based only on the amount that has been drawn down. For example, if the total approved construction loan is $400,000 but you have only drawn $100,000 to pay for stage 1, your interest is only based on the amount drawn of $100,000. This means you are not forced to pay any interest on funds that have not been used, saving you in interest repayments and supporting your cash flows.
While the rates on construction loans might be slightly higher to begin with, once construction is completed the loan can revert to a standard mortgage loan, enabling you to benefit from lower rates.
Now that you have a simple understanding of construction loans let us talk about some of the issues our clients have faced with their construction purchases and loan applications and how we have helped solve every issue and get our clients to achieve their dream of owning their self-designed home.
Limitations on lending
Determining the amount of borrowing the lender will approve depends on several factors which include the valuation of the property upon completion of the construction stages.
While most lenders will allow you to borrow up to 95% of the property value when applying for a loan on an existing home, construction loans can be limited, and the maximum lending can change from lender to lender.
In current market, most lenders limit that borrowing for construction purposes to 90% which means you need higher savings to support this type of purchase. Some lenders even limit the lending amount to 85% and even 80%.
Greenline Home Loans ensures we are kept up to date with the lending market to ensure we can find our clients the most suitable solutions and when required find them the lender to support the purchase on the 95% LVR basis.
Essential repairs
When signing a construction contract with a building company it is important to understand what is included and what is excluded from the contract. Ideally you would want everything included in the contract, from the house interior including flooring, blinds or the air conditioning unit, and exterior all the way to the driveway, landscaping and fencing in the back.
The valuation report which supports the loan application will include any item excluded from the contract and an amount itemised under “Essential repairs” which the lender will want to ensure you have sufficient funds to cover. Essential repairs can amount to $20,000 or $30,000 at times and this means you will need to hold that amount in addition to your required deposit funds prior to the loan being approved.
At Greenline Home Loans we support our clients and have been able to secure lending for these out of contract items by providing the lender with quotes for these out of contract items and borrow funds to pay external contractors for the work.
Progress payments
Once you have secured the loan and settled on your land you will move into the construction stages. At this stage, the builder will issue invoices against every completed stage of the construction and will request payment. There are several steps that must be followed before payment is made by the lender including an inspection of the construction site by the bank valuer, and provision of supporting documents from the builder. Most builders request payment within 7 days of issuing an invoice, with penalties for late payments, which can put a lot of stress on the clients to ensure all requirements are met in a timely manner.
At Greenline Home Loans we take the stress away from our clients and support them throughout the entire process by managing all construction stage progress payments and liaising with the builders, lenders, and valuation firms to ensure a timely turn around time for each payment request. This takes the stress away from our clients and can save them potential penalties.
If you are considering building your dream home and need to discuss your finance requirements, talk to our team of experienced brokers at Greenline Home Loans. We will tailor the best solution for your needs and walk with you hand in hand from the first day you consider the house design and until you get the keys and move in.