Are you sitting on equity that could be building a property portfolio for you?
For many, a home is something that is a bucket list success, for others it is an investment towards financial freedom and financial security. And then there are many people who go out to purchase their new home purely for the independence and escape of living with the parents. If you’ve already ticked this off your list and thinking about your next move, it’s good to know, that in fact, once you get into the property market with one home, it is generally a lot easier to get your 2nd and 3rd property.
Given the current tax system and fairly steady property market growth, property investment is a great way to build wealth in Australia. Below we’ve included some statistics to help you put things into perspective and hopefully motivate you to start looking at building that investment portfolio up
According to the 2016 Census of Population and Housing (Census), there were nearly 8.3 million households in Australia. Where household tenure was known: 67% (5.4 million households) were home owners: 32% (2.6 million households) without a mortgage.
Homeownership data from the 2016 Census show a home ownership rate of 67%, down slightly from 68% in 2011. While the home ownership rate remained around 67–70% from the mid-1960s, the rate for different age groups has changed.
It’s interesting to see that the homeownership rate of people aged 30–34 is actually down from 64% in 1971, decreasing to 50% in 2016.
For Australians aged 25–29, the decrease was similar to —50% in 1971, decreasing to 37% in 2016. Home ownership rates have also decreased among people nearing retirement. Since 1996, home ownership rates have gradually declined; rates for the 50–54 age group have seen a 6.6 percentage point fall over these 20 years (80% to 74%) (AIHW 2019).
It will be interesting to see the next census report in August 2021, with the census test being held last month (27 October 2020) with 100,000 households from all over Australia. And we’re sure to see some massive changes due to the pandemic at hand…
But before we go any further, let’s look at the statistics to gain a better understanding of how things have changed.
Here are the stats:
When we look at investment properties, According to the 2017-18 stats, one in five Australian households – that’s 1.86 million – own property besides the one they’re residing in. This includes those that own investment properties and/or holiday homes. Of those: 71% (1.3 million) owned one property (besides their current place of residence)
Depending on your investment strategy – i.e. going for capital growth or positive cashflow – (we’ve explained these in full detail below). There are locations where you can expect both, but this can take a bit of inside knowledge or the help of a property investment specialist to assist with. Cashflow is a common strategy to build equity fast and get to the next property purchase. But make sure you have enough of your own cash flow to cover costs. We suggest using someone like Over and Above to help define your strategy and help find the right properties.
Positive Cash Flow
The goal with an investment property is to ensure you have a Positive Cash Flow. The basic definition of a positive cash flow property is an investment property where the income (usually derived from rent) is greater than the sum of all of the expenses of the property.
This means that you are bringing in more rent each cycle (week/month/year) than you are paying out in expenses. Ultimately the rent is covering ALL your expenses AND giving you some money left over at the end to do with as you would like.
We then look at the long term goal, being capital growth, sometimes known as ‘capital appreciation’ simply referring to the increase in the value of your rental property over time. As a guide, if you invested in an apartment costing, say, $500,000 two years ago, and sold it for $550,000 today, the property would have notched up capital growth of $50,000.
The reason this type of growth is so valuable to investors is twofold. Firstly, it is money you have earned without lifting a finger (depending if you have done renovations) – and that’s always appealing. Secondly, capital growth protects your wealth against inflation.
Think of it this way. If you’d stored $500,000 in a savings account instead of buying a rental property, your money would earn interest but the value of your capital (in this case $500,000) would remain unchanged. Thanks to inflation, the purchasing power of your cash savings will decline over time. The capital growth of property protects your wealth against inflation.
Whilst there are many benefits of owning a second property, you will still want to avoid a couple of things in order to save yourself money.
Firstly, you will also want to avoid paying LMI, to do this you will typically need a deposit of 20% or more of the lender’s valuation of the property. Or in other words, you would want your LVR to be 80%.
To understand LVR (Loan to Value Ratio) it is the amount of your loan compared to the value of your property. LVR is calculated by dividing the amount of the loan by the value of the property.
For example, if the property is worth $250,000 and you have a deposit of $50,000, the LVR will be 80%.
Secondly, Capital gains tax. Capital gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price.
To do this you can:
- Adjust your profits to reflect any acquisition costs or property improvements
- Depreciate the property if it was used as a rental
- Rent out your second home
- Make your second home your primary residence
- When in doubt, talk to a professional
Now that you have this info, we hope you have put your ‘investor hat’ on and you are wanting to look into this further. Before we let you go we want to remind you that it’s vital to understand the importance of a good broker to target lenders that suit investors (that’s you!) A broker (that’s us!) can help you find the right home loan for your needs and circumstances and support you throughout the entire application and settlement process.
So what are you waiting for!? Are you sitting on equity that could be building a property portfolio for you?
Find out today! Contact us here for an appointment, and let’s get you started!