Property as a form of investment has long been popular with high income earners who want to grow their wealth. Its reliability, flexibility, as well as the comparative ease of understanding the real estate market, has made property an attractive option as an asset.
High earners in Australia
According to 2010-11 figures from the Australian Taxation Office, there is a large number of high income taxpayers in Australia. The population of those in Australia's top tax bracket alone - earning $180,001 or more - was 251,397, a figure that doesn't count all those Australians who made marginally less, but fell into a lower bracket.
This figure includes professionals like doctors, lawyers and engineers. Some of these Australians will already have recognised the benefit of investing in property and built successful portfolios. For others, they may be so focused on their careers that they simply do not have the time to think about investing, let alone manage a whole portfolio.
Yet even these high-earning Australians cannot simply rely on their superannuation and whatever savings they may have made to get them through retirement. For one, they pay more tax:
- $17,547 plus 37 cents per every dollar over $80,000, if they fall into the $80,001-$180,000 bracket
- $54,547 plus 45 cents per every dollar over $180,000, if they fall into the top bracket
Secondly, these savings may not be enough for the kind of lifestyle they want. As of December 2014, the Association of Superannuation Funds of Australia lists a "comfortable" lifestyle as requiring $58,364 a year for a couple, and $42,604 for a single person. This may not seem like much, but given that people are living longer and longer, even high earners may find their super gets stretched.
So how can you continue to fund the kind of lifestyle you want post-retirement? An investment property portfolio is the key. And best of all, it can allow you to keep living the kind of lifestyle you want after you stop working, as well as reduce your tax bill at the end of the day.
The DPN process
Some people think the most effective real estate investment strategy is to follow the home values. For instance, if you live in a good suburb, it's tempting to go with what you know and buy there.
But this isn't the best solution. Homes in exclusive suburbs tend to have a high entry point, as well as a lower growth rate. Not only that, but the pool of tenants who can rent there is relatively low. By taking this strategy, you close yourself out from many potential buyers and tenants.
At DPN, we have a different investment property methodology. We advise our clients to look at high growth properties in up-and-coming outer suburbs that may not have the name recognition of other, more exclusive areas. By broadening your scope, you leave yourself with a much higher chance of success.
We also have a particular set of selection criteria when it comes to choosing an investment property:
- City profile - we look for a combination of consistent population growth and sustainable infrastructure. After all, a property needs a solid pool of buyers in order to be a useful investment, and infrastructure tends to drive up the value of nearby real estate.
- Growth forecast - capital growth is what it's all about, and we try to identify suburbs in major cities that have a growth rate of at least 5 per cent predicted.
- Affordability - suburbs with median prices that appeal to a broader market for renting and selling are more likely to be resold, as well as attract tenants.
- Land - a land component is a key factor in the properties we look for, as land appreciation can add significantly to capital growth over time.
- New build - newer properties tend to have higher depreciation rates, which mean stamp duty can be reduced or even avoided.
Though they may be worth the same in principle, two $500,000 properties may prove to be a better investment than one $1 million property. For instance, let's say the two more affordable properties grow at a rate of 7 per cent a year. Their value would double approximately every 10 years ($1 million) and double again in 20 ($2 million), leaving you with a portfolio worth $4 million in two decades.
Even when you subtract the cost of borrowings, at around $1 million, you're still left with $3 million. By contrast, that $1 million property growing at only 3 per cent may seem at first like it will net you more, but it would fall far short of this target - particularly when you take into account the rental income.
Once your strategy is sorted, you also need the right investment finance structure in place. This can include many factors:
- The type of loan - will you go with an interest-only loan, where the principal stays the same, or do you want to make one part of the loan interest-only and the other part interest and principal?
- The features on the loan - a 100 per cent offset account, for instance, can be a useful way to keep your interest payments low.
- The interest rate - will it be fixed, variable or both, and in what proportion?
That's why it's crucial to work with an experienced team like DPN's, who can navigate these complexities with ease and have the right industry connections to give you the choices you need.
Reducing your tax
Once you've purchased your investment property, it's all about reducing your tax.
Minimising your tax burden is far from a supplementary part of this process - it's integral. Fortunately, the Australian tax system allows investors to claim any expenses involved in running an investment property against their taxable income. This is called negative gearing - when the cost of running your property is larger than the rental income you receive.
The expenses for which you can claim an immediate deduction are many and varied. If you took out an interest-only loan, for instance, it's useful to know that you can claim interest payments as a deduction. You can also claim for costs as diverse as:
- Land tax
- Repairs and maintenance
- Pest control
- Tenant advertising
- Council rates
- And even what you paid to travel to inspect the property or collect rent
And this is just a short list - there's many more.
The tax savings can also be substantial. For example, let's say you made a 10 per cent deposit ($50,000) on one of your $500,000 investment properties. An interest rate of 4.5 per cent on a loan worth $450,000 would cost you a whopping $20,250, which would climb to $25,750 once other expenses - such as insurance and property manager fees - were calculated.
But earning $500 of rent a week would net you $26,000 a year, and you would receive a tax refund of $4,641 for costs and depreciation based on the 39.5 per cent tax bracket. This would leave you with a total income of $30,641 for the year, and after-tax positive cash flow of $4,891.
Working with the right provider
A lot is involved in creating a good investment portfolio, but it can be easy with the right provider. DPN will offer you a free property investment plan tailored to your specific goals and circumstances, as well as supply you with well-structured financing and advise you on reducing your tax.
You also don't want to leave your portfolio in stasis. With DPN, you'll regularly review your portfolio and see what you need to change in order to keep moving forward. At the end of it all, you'll be living out your golden years how you always pictured them, and loving every minute.