As many of us know, buying where you can afford does not always equate to buying in an area you love. Even the worst house on the best street can be way out of budget these days. So how can you enter the property market to become a home owner AND live where you really want to live? It’s simple really: rent where you love while buying to invest where you can afford.
Though often overlooked as an option, there is no rule that says you need to own your principal place of residence in order to invest in property. In fact, it’s a really effective double play with many potential benefits.
Of course, you’ll need to make some smart decisions for this to work for you. But when done well, buying an investment property while renting in your dream location can give you all the benefits of property ownership without sacrificing your lifestyle.
There are other perks too. Let’s consider them:
Effective wealth creation — sooner
By the time you saved enough or waited until circumstances allowed you to afford to purchase in the area you truly want to live in, chances are you will have missed out on a lot of capital growth. Not to mention strong rental returns from your property (again, it’s all about choosing wisely — this is where we really shine for you).
Purchasing to invest rather than live could even enable you to generate cash flow. Down the track, or right away in some cases, rent from your investment could be paying off the property, and contributing to or even covering your rent! Compare this to owning your own home — you won’t generate any cash flow from it and in fact won’t really know if you have any profit from it until it comes time to sell.
Tax advantages on investment properties
As an owner of rental properties, there are many tax benefits for you to lessen the cost of property ownership. Many of your property expenses such as improvements, maintenance and repairs, can be offset against your rental income. Depreciation of your property can be a tax deduction. Even the interest on your property loan can be claimed as a tax deduction, if your property is negatively geared.
When done properly, the cost of paying down the loan on a rental property should be achieved by the Tax Man, the Tenant and to lesser extent, You, the investor. The debt on a rental property is good debt, as opposed to owning your principal place of residence, which is bad debt.
We can help you get the most out of your investment property (and the tax man), just chat to our team.
Continue to rent in the location you love, while in the meantime your investment property increases in value or you buy more properties to create an impressive portfolio. Buying to invest means you could go on to purchase additional investment properties without the need to sell up and pay capital gains tax.
By living in a rental, you can change where you live without the need to pay expensive fees like stamp duty.
And if you do still want to purchase a principal place of residence, you’ll have equity behind you to perhaps even end up buying in that dream location after all!
Share the investment
Depending on your financial situation it may be worth considering buying an investment property with a trusted family member or friend. You would be unlikely to do this when purchasing a home to live in, but sharing income drawn from an investment property can work.
Explore your options and make the right property choice to suit your circumstances and goals
Your property goals are our property goals at Providence Property Group. With a focus on research and a commitment to results that exceed your expectations, you can trust our team of property investment specialists to guide you in the right direction based on your goals and budget. In fact, we can do more than just guide you — our services and expertise extend to helping you right through the property research and purchase journey, and beyond.
Is buying to invest right for you? Start a conversation with us today by calling 1300 25 25 50 or email firstname.lastname@example.org. Alternatively, just pop your details into this contact form and we’ll get back to you.
We’re all known to wonder where our money goes or try to make sure it goes to the right places, but do you really have a clear vision of your expenses? Understanding Tax Freedom Day is a sobering concept, but one that is vital for you to take control over your financial position and ultimately pay less tax in Australia.
Prefer to listen to this information via podcast? Click here.
What is Tax Freedom Day?
What do you think your biggest expense is? Your mortgage? Private school fees? Your passion for travel? For the majority of people taxes are your number one expense.
If you look at your pay slip, you’ll see that PAYG figure that denotes the sum that the government’s hand has swept in and taken before you’ve even noticed. If you work for yourself or run a business, you might PAYG too – if not, you probably end up paying a lump sum of your earnings out to the ATO at the end of the financial year.
When we look at it, we need to remember that it is actually calculated on the total taxes collected by all three levels of government. We are not just paying tax directly to the ATO – we pay all these other indirect taxes too, including GST and council rates.
With taxes at front of mind as your biggest expense, Tax Freedom Day sounds quite important doesn’t it? Tax Freedom Day is the number of days that we work for the tax man at all three levels of government before we start earning for ourselves.
Over the last 50 years we’ve seen the trend in taxation whereby Tax Freedom Day is moving out later and later in the year, and it’s getting worse.
In Australia in 2016 you had to work until May 9 to pay all your taxes to the Australian Government. This is similar to the US and UK, who have Tax Freedom Day on April 24 and May 8 respectively.
What is particularly sobering for Providence clients to learn is that if you are paying off a mortgage, you spend most of the year working for both the government and the bank. That’s what you spend your time and effort doing for weeks and months of the year. Needless to say, this is far from ideal. It’s no surprise that we all look for ways to pay less tax in Australia.
Pay less tax in Australia
A key part of the work we do at Providence it to help our clients to move Tax Freedom Day back as early as possible in the year for themselves. This certainly isn’t about evading tax, as we all have an amount of tax we need to pay. However, the tax system and the code is written with room for allowable deductions for certain things.
Tax benefits of owning an investment property
Owning an investment property has many benefits and is a way that we guide clients to manipulate Tax Freedom Day for themselves. Through investment property ownership, you can move your Tax Freedom Day and effectively have the tax man become a contributor to your wealth creation strategy.
The best way we know to do that is to find a growth property that the tenant and the tax man pay off for you. And what we are seeing is the longer that you leave this the more money that you are letting slip through your fingers. It’s very important to take action.
When identifying property opportunities to meet our clients’ goals, the key factors that we look at are capital growth, yield, cash flow, depreciation and other allowable deductions. These help contribute to funding a property, so we’re analysing all of these factors and also ensuring that there are three parties paying for the property. That is, the purchaser, the tax man and the tenant. The tenant will usually pay around 60% of the cost, the tax man can pay roughly 30% and the purchaser covers around 5-6%.
Once you own that property for three or four years and the rent starts increasing, the tenant actually starts contributing to more of that. And importantly, in terms of Tax Freedom Day, the tax man is typically contributing about 30% to the cost of that property.
Let’s make that clear – in this wealth creation strategy, the tax man ends up contributing to you paying off that asset and your savings for retirement and you pay less tax in Australia.
While rental yield and capital growth are the most important when it comes to investing in property, there is a lot to be gained from a tax flow perspective too. Whether you’re a first, second or fifth time investor, if you’d like to learn more about the contributional tax benefits that you can generate from owning an investment property, our team has the expertise you need. You can contact us here.
Listen to Simon Harris and Jay Pace talk about Tax Freedom Day in this podcast episode and discover how you can pay less tax in Australia.:
Written by Lynton Stevenson, Managing Director, Providence Property Group.