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Investors own property primarily to secure a better financial future for themselves and their families.
Property is a reasonably simple investment to understand. There will always be demand for rental housing because not everyone can afford to, or wants to, buy a home.
Property is easy to see. A house is a real object. It produces a regular income which will rise over the years and it usually produces a capital gain, which means a profit when it's time to sell.
It is an investment over which the investor can have as much or as little control as they choose.
You can add value by renovating, redeveloping or simply giving it a quick makeover.
Property can also be about your future. An investment property can be a part of your lifestyle or future lifestyle. It’s all about choices.
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The term refers to how much of your home you actually own. Equity is basically calculated by finding out the value of your home and subtracting the amount still owed on your mortgage.
Equity is achieved in two ways - by paying off the mortgage and from an increase in the property value. Many people who bought a home five years ago or more will have achieved a bit of both.
Home equity is useful to you as a potential investor because it is what the bank prefers as security to minimize its risk.
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But more importantly, property investment is about leverage. Finance lenders will lend more money to buy property than any other type of investment. They will often lend 110 per cent of the value of a property if there is equity in another property; they consider it to be a much more stable investment than other investment options.
Because banks and lenders will lend more for property than, say, shares, you can invest a lot more money in property. The advantage of having extra leverage is the ability to multiply gains when values rise.
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With investment property you are not alone in paying the mortgage.
First, you have a tenant. The tenant pays rent and that usually covers a large part of the mortgage. In some cases, when a property becomes positively geared, it pays all of the mortgage and the other expenses as well.
Second, you have the tax man. The tax man helps by allowing you to claim back some of the ongoing losses if the income (rent) from the property does not cover all the expenses. This is called negative gearing. Gearing basically means borrowing to invest. An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared, as you are able to deduct the costs of owning an investment property from your overall income. The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs.
There are both cash and non cash expenses that are tax deductible on the purchase costs. These include bank application fees, stamp duty on the mortgage, valuation fees, mortgage insurance and any consultancy fees related to the purchase.
You can also claim depreciation, effectively giving you a cash return on the costs of fixtures and fittings, building costs (2.5% p.a. over 40 years) and inspection costs.
This is who pays for your property:
Calculating depreciation is very specialized and PWF uses a depreciation specialist called a Quantity Surveyor. A Quantity Surveyor is able to obtain maximum deductions through preparing a depreciation schedule. One of the other factors to ensure that you are receiving maximum tax deductions is to purchase a new property. Click this link to see a deprecation schedule on the new property shown below.
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