LEAVE IT OR LIST IT?

Reception • February 23, 2020

First homes, like first loves, are important milestones in our lives representing more than just bricks and mortar. And like our first loves, most of us eventually move on from our first home. Needs change, families grow and we find ourselves looking for a new property.


This is often a time that property owners turn their thoughts to investing, looking to own an investment property as well as a home to live in. The simple solution would seem to be to hang on to your first home and keep it as an investment property, right?


Wrong!


In most cases, keeping your first home as an investment property isn’t advisable, especially if there is substantial equity in the home.

There are, of course, exceptions to the rules. As your personal financial specialist we can look at your unique situation and help you make the most financially sound decision for you.



A few points to consider…

CAPITAL GAINS TAX AND THE SIX YEAR RULE


When you sell a home that has been used only as a principal place of residence, it does not attract capital gains tax (CGT). Conversely, a home that has been rented out will attract CGT. However, under the six-year rule, a property can continue to be exempt from CGT if it is sold within six years of firstly being rented out AND you


DO NOT own another principal place of residence. We can recommend specialists who are best placed to advise you on CGT implications and obligations.

 


Capital growth potential


Understand the future value of your first home before making any decisions. Look into comparable sales in your area, and research planned developments and infrastructures that may impact its future value.


Again, advice from our financial and real estate experts will help you weigh up potential capital growth against potential capital gains tax and other considerations.

 


Rentability


Our first home is often purchased using a criteria that is different from the one we would apply to an investment property.

When moving on from that home, consider if it will be easy to rent long term.

Just because you have loved the home, it doesn’t mean renters will. Speak to local property managers and investigate supply and demand in your area.


It is worth remembering that rent is considered as income, and if your rent is more than the loan and property costs, you will pay the marginal tax rate on the income plus your PAYG income.
 


Renovations


Whether renovations (improvements) are required to bring the home up to a rentable standard is an important factor to consider, and one that may tip the scales on your decision. Landlords are required to ensure the property complies with safety standards and meets the requirements of a rental property. These standards and requirements may have changed since your home was purchased and could represent a significant financial outlay.


It is worth keeping in mind that only certain improvements will be deductible in line with a depreciation schedule.


Also note – If renovations or improvements are completed before the property is rented, the costs will not be tax deductible, as they will be considered as home improvements before renting. If the renovations are done after it’s rented, then the renovations are considered improvements on the property and may be tax deductible, but only for the time it is being rented. Your accountant is best placed to advise you here.

 


Home loan considerations


The decision of whether you keep or sell your first home is largely dependent on your ability to service the mortgages required. How much you are able to borrow (for one or both properties) will be dependent on:


  • how much equity you have in your first home
  • the total amount you need to borrow, and
  • your ability to service both loans.


Lenders have different criteria with investment finance and will generally only consider 70-80% of the rental income.

 


Using your equity to buy


The greater the equity in your current home, the more you can borrow to buy another home. In addition, when buying your second home, it is possible to use the available equity in your current property as your deposit.


Depending on the increase in value since you purchased your home, you may have more equity than you imagined. This can be used instead of a cash deposit when buying your second home. However, if you use the equity from your existing home, it will need to be identified separately because the original loan will now be considered as investment, most likely be financed as an interest only loan and will be tax deductible.

Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply. © 2018

6 Tips to Help Choose Between Selling or Renovating

By Kola Dev • September 2, 2024
Assessing the benefits of an extensive home renovation against selling your property is always a worthwhile exercise. Selling your home is rarely an easy decision. It will often hold family memories, and that makes it tough to leave. It’s also likely to be your most significant financial asset, and you want to be confident you can maximise its value. The process of selling isn’t cheap with commissions, legal fees and taxes. But the alternatives are to tolerate your home in its current condition or to talk to an architect or builder about giving your home a makeover. That’s not cheap, either. Costs can run into hundreds of thousands of dollars, and there’s never a guarantee the work will finish on time and budget. If you think selling is stressful, you should try a large-scale renovation! Regardless of which way you jump, it’s likely you’re going to need finance - whether that’s refinancing your current loan for a renovation or a new loan for a new property - so it’s worth talking to your mortgage broker to understand your options. Here are a few tips to help you think it through. 1. Structural issues Nothing dates a bathroom like colour. You can tell if it was built in the 70s and 80s merely by the colour scheme. Most bathrooms today are based on white, rather than old school creams or browns. If your bathroom can remember when David Cassidy was making hits, then the time to act is overdue as aging bathrooms usually also have waterproofing issues. 2. Money in the bank You can afford to decide whether you want to pour your hard-earned cash into your existing home, or climb the property ladder and find a superior property. Or if you’ve paid down a lot of your current home loan, you may be able to redraw to fund a renovation. 3. You intend to stick around If your home is well located, you may opt to stay and maximise the potential rather than move. However, if you favour a renovation, be aware that upgrades offer the best payback when you sell within a year or so of the work being completed. Your new kitchen doesn’t stay new forever although it is likely to give you a lifestyle benefit for at least a decade. 4. Big squeeze If your current home is getting too small, you’ve got the option of building an extension, but that means you’ll have to battle the planning process as well as the stress of selecting an architect and builders and perhaps paying rent while the work is being done. If the rebuild is so big that you need to move out anyway, a new home might be a more straightforward option here. 5. Living in the 70s Many owners who take the upgrade path want to modernise their homes. They’re fed up with the rabbit-warren design of small, disconnected rooms and yearn for open-plan living, plus a new kitchen and bathroom. Making such fundamental changes are expensive, and it is worth checking out the prices of more modern homes nearby before going ahead with a renovation. That will help you understand the value that you’re adding. 6. Dead space Poor design can result in some rooms being ignored, either because of their size or their position relative to the main living areas. Real estate is not cheap, so this is very wasteful. If fixing the problem is difficult, finding a new, better-designed property will pay off for you financially in the medium to long-term while also helping you take the next step on the property ladder. Give us a call on (03)8657 8664 to have a chat about the best way to fund your home improvements.

Tax Deductions for Investment Properties Explained

By Kola Dev • August 5, 2024
Owning an investment property is a little like running a business. It provides a great source of income and builds personal wealth but inevitably comes with a series of costs that hit your bottom line. The excellent news for property investors is that many of these expenses are tax-deductible. Tax advantages are not just available on new properties. While an older building may have limits on what you can claim, you do not have to buy a new house or apartment to qualify for tax benefits. There are two components of a tax claim for a rental property. These are: Capital Works Allowance covers the structure, such as walls and roof tiles; and Plant & Equipment covers the so-called removable assets such as carpets, stoves, and hot water system.  You should always obtain professional accounting and tax advice to understand exactly what can and cannot be claimed according to your own specific circumstances as the Australian Tax Office changes the rules regularly. For example, only investors of new property can make claims under plant and equipment assets. However, exclusions exist for those properties that have been renovated. Those who own older properties can continue to depreciate items that fall under the capital works component, so long as it was built after September 15, 1987. And you may benefit from depreciation even if a previous owner undertook improvements. So, working out what you can claim legitimately requires the eagle eye of a professional. In general, you will find the following items are tax-deductible: Costs associated with a property manager, which are usually 3-8% of rental income Accounting and professional financial advice Advertising if required to find new tenants, plus associated re-letting costs Strata levies Rates and land tax Insurances Loan interest and ongoing loan fees Also, work with your accountant or financial adviser to build a tax depreciation schedule for your property. This document will list all the items in your property that qualify for depreciation. It should only need to be completed once, and it can then be submitted to the ATO each year to ensure you obtain the maximum possible tax benefits from your rental property.

A Guide to Purchasing Your First Investment Property (and Beyond)

By Kola Dev • July 1, 2024
Investing in property isn’t rocket science but there are a few rules savvy investors should follow for success. Here are some things we’ll cover in the next couple of weeks to get you started. Should I invest? Investing isn’t right for every one.The first thing you need to do is make sure you’re in the right financial position to take the risk. How do I build a strategy? Before you start your journey you need to do plenty of research and build a strategy around your specific budget and financial needs. How do I choose the right loan? Once you get your finances in order, start shopping around for a great loan. Make sure you get pre-approval from your lender before you start looking for your investment property. How will I manage my investment? It’s important to remember that an investment property is a long term commitment and you need to know how you are going to manage it over the life of your loan. With the right advice and loan, property investment can be the most satisfying and profitable decision you make. If you have any questions or want to discuss whether property investment is right for you, contact us on (03)8657 8664 or email us at reception@futurefinancegroup.com.au
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