CAPITAL GROWTH FOR PROPERTY INVESTORS

Although any capital gains in Australia are subject to a Capital Gains Tax, property investors are still finding the advantages of capital growth.

When considering an investment property to buy, property investors look at the rental income potential first, because they need an income from the property to service the interest on the mortgage loan and cover the costs of maintenance, repairs, rates, insurance and the agent’s property management fees. Like any “business’ these costs are known as “Operating Costs” and are tax deductable form the income receive.

If the income from the investment is less than the “operating” costs of the property, then the investment is known as a “Negative Geared Property”, meaning the property investor can offset any tax liabilities from other sources of income by the amount of “loses” made on the property.

In such cases, the investor will look to the capital gain when the property is sold to “repay” the financial losses in the property over the years the property has been owned and history shows the longer a property is owned, the highest the capital growth.

Capital gains are only payable in the Tax Year in which the property was sold and all costs associated with the purchase and the sale of the property (but not the “running cost”) can be deducted from the “profit” made on the property – the Capital Gain.

For example, if a property was purchased for $200,000 and the cost of purchase was $10,000 including Stamp Duty,  mortgage establishment cost, legal fees and searches, and the property sold for $550,000  but the agents fees including marketing and the legal cost were $15,000, the actual capital gain would be $350,000 less $25,000 = $325,000.

Capital Gains Tax is set at 50% of the net capital gain so tax would be assessed on $126,500. The tax rate would be based on the current tax rate paid by the property owner.

With interest rates at the lowest level in Australia since the late 1950’s – over 65 years ago, it is rare that a property is negatively geared as in most cases, the rent received is more than the outgoings, so for investors who have a high tax threshold and pay tax at a high tax rate, the benefits of negative regearing to reduce the tax liability is almost eliminated.

Nowadays, for the investor, a property can be viewed as a totally income producing investment with the income providing a “profit” from the rent received and a capital gain as properties increase in value particularly in parts of Sydney and Melbourne.

The recent volatility in the stock mark has also seen investing in real estate as a good strategy.

However, it is not all good news for investors. Location is still the key factor in selecting an investment property as property investors in the “mining towns” have now discovered to their cost with falling rents and falling property prices. In some locations, rents have dropped from $1,300 per week for a 4 bedroom home to $280 per week (If you can find a tenant) and from a purchase price of $650,000 to a selling price of $320,000 (If you can find a buyer!)

In some new suburbs in the outer suburbs of the metropolitan area, “marketeers” are still active in encouraging interstate investors to buy a brand new property because tenants like new homes and there is the maximum tax relieve available in the depreciation rates of the construction and fittings.

But, attractive as these properties are, there can be a decline in the rents that such “new” properties can achieve after the first year and this will effect the property selling prices if a number of properties come onto the market as investors decide to sell their properties.

Although costing more, many astute investors chose properties within 10 km of a capital city's CBD and achieve a good rental returns and capital growth.

Beware of investor magazines and "blogs" that provide tips on the “Next best investment Suburbs”.  In some cases, the statistics of a “30% capital gain growth” has already occurred and may never achieve such growth again. This is particularly true in the semi-rural areas and regional centres.

The “pointers” to future capital growth haven’t changed over the last 30 years – they are;-

• Within 20 km of a capital city or main tourist centre.
• Where there are good transport links.
• Where Infrastructure has been build or there is a guaranteed commitment to build the infrastructure.
• Within 5 km of a shopping centre, hospital, airport, and university-educational establishment and good schools with a “brand name’.
• In the “catchment” areas of sought after schools.