There’s a big disclaimer on this one… there are always exceptions to the rule!
Many have and will continue to do brilliantly out of well-thought-out investment property strategies. But here’s some basics that many don’t consider before embarking on an investment property, sometimes before or instead of their own home.
Investments are generally riskier than homes. For one, you probably trust yourself over any tenant. Investment properties can and often do come with unforeseen costs in maintenance and property degradation. The term negative gearing means that the property costs more than it earns, which is fine for those on high tax brackets looking to reduce their income tax for the sake of long term capital growth. But it’s generally not great for first-time property investors.
Because of this, and the flow-on assumptions that banks make about the income and the expenses of an investments property, it generally reduces borrowing capacity. Despite equity that may be built up over time, which can in part be released, the borrowing capacity can fall short at the time of an intended home purchase.
Capital gains tax kills many investment property strategies when compared to a home and/or super. In Australia, we are really lucky to never pay capital gains tax on our own home. On the flip side, in the year that an investment property is sold, 50 per cent of the gain will be added to the tax return as income and taxed accordingly. That means the usual employment income and the gain are generally taxed at the highest marginal tax rate. Ouch!
For many, unless excessive surplus cash flow needs a home, paying down the mortgage as quickly as possible, combined with some super savings (which is Australia’s other tax-free gift – talk to your accountant or financial planner about that one!) is the fastest and least bumpy road to financial freedom. In a year that’s taught us to treasure the simplicity of life, that’s a great goal for 2021!
For those who follow our regular tips, and for our many clients and friends on the Surf Coast, we wish you bucket loads of happiness and fun over the festive season! This year more than ever, we all deserve it! We will try to wind down from December 18 for two to three weeks, but remain available for all urgent purchase and settlement matters.