Investing in Real Estate

There are numerous ways to invest in real estate; examples of three of these are listed with brief explanations. We would encourage anyone looking into investing in Real Estate to seek professional advice.

Purchasing land and holding onto it

The simplest form of investing in Real Estate is purchasing a block of land; this is a long-term investment. No matter what the present economic climate history has shown that land prices will increase over time and often by huge amounts.

Purchasing a property and renovating

Purchasing a property and renovating can be quite rewarding, but beware of over-capitalising. When you purchase a property with a mind to improving it and making a profit, there are quite a few pitfalls

Always make sure you have registered builders to check out the property - it is easy to overlook things. Structural, electrical, and plumbing can be very expensive if there are problems which you haven't budgeted for. Once the hard work is done and it is hard work, do not over-price your property, sometimes it is easy to put an emotional price on properties. Get a real estate agent to give you a market appraisal, these are free and are normally based on properties that have been sold in the area of your property and on the economic climate. Keep a good record of every cent you spend on the property as the cost of the purchase plus every cent you spend on the improvements is taken off the sale price before any tax is payable. If the property is your principal place of residence you should not incur any taxes on the Sale.

Purchasing a property and renting it out

If you purchase a property as a long-term investment you can either negative or positively gear the property. Negative gearing is when your outlays exceed the income of your property; this is a tax deductable amount and can be a real bonus when tax time comes around. There is a long list of expenses in sustaining a rental property. The purchase price of a rental property, chattels and any capital improvements are depreciated over time. All the sundry expenses and repairs are an expense which is taken off any rental income to give you either a profit or loss on your property per annum.

Examples of expenses are

  • Interest on any loan to purchase the property (most financial advisers recommend taking out an interest only loan).
  • Rates and land tax
  • Property management costs
  • Maintenance
  • Insurances including, property, chattels and landlord's insurance
  • The cost of any repairs

There is a difference between repairs and improvements. To replace something which is broken with the same type of thing is classed as a repair, but if you replace with something different it could be classed as an improvement and therefore a capital cost. If this is the case, the cost of the replacement will need to be added to the capital cost and depreciated over time. An example of this would be the replacement of an old paling fence - if you replace it with a paling fence it would be classed as a repair but if you replace the fence with a brick fence it could be classed as an improvement and therefore would be classed as a capital expense.

There is profit to be made in Real Estate no matter the economic climate; there is also plenty of great self-help books and other literature available. Please note there may be Capital Gains and land taxes payable on the sale of these properties, we recommend you seek advice from your Accountant regarding these.