Investment Home Loans
One path that many have taken to gain financial security is by investing in real estate. If done shrewdly, it can be a positive way to increase your cash flow and make a healthy return on your outlay. This article aims to inform you of the advantages and disadvantages of such an investment in addition to what you should do and what you should avoid doing during the process.
Tax and Deposits
It is important to get the right advice regarding an investment home loan. It is different to an ordinary home loan in that it can be structured to take advantage of taxation rules as the interest on your investment home loan can be tax deductible if structured in the correct way. You should speak with your account or qualified loan profession before you take out a loan so that you can learn which name(s) or structure you wish to put the loan into in order to maximize your tax deductions.
If you own a property already, you may be able to buy an investment property without a deposit, as you can use the equity in an existing property as collateral.
Many lenders will only lend up to 90% of the price of an investment property. If you do not have at least a 10% deposit or equity in another property, you will probably require mortgage insurance, which will need to be factored into your investment calculations.
The Advantage of an Investment Home Loan
If you can find a property where the rental return is greater than your interest cost, then you have increased your cash flow with no decrease to your net assets. This type of leverage is called positive gearing and it can be highly lucrative.
However such properties are uncommon, particularly in Australia, which has enjoyed a long property boom. Thus many investors find that the net rental return after interest expenses are deducted is negative. In Australia this is known as negative gearing.
Investors can decrease their tax liabilities by deducting the net loss from their income. If you are a high income earner, this can be quite an attractive option particularly in a long term property boom as you decrease your tax bill while your asset grows.
owing asset. The top tax bracket in Australia is close to 50%, so the loss on your investment property at the upper end can reduce your investment losses by close to half while you increase your equity in your investment property.
Some Disadvantages and Pointers to Remain Careful of
While opting for an investment home loan you must be careful about the amount of money you borrow. Some unscrupulous brokers can allow you to borrow more than you can actually afford, this is dangerous and could eventually turn your investment dream into a nightmare when you can't pay back what you owe.
Additionally, although it can be a great advantage, it is worth considering whether you wish to use negative gearing. Negative gearing refers to borrowing money to purchase an asset such as a home but the income produced by the asset does not cover the interest on the loan. This has been a very popular option in Australia however you must remember that you can only get a tax deduction if you have a loss in your investment. It's a very tricky situation. You are making a bet that the price of your investment property will rise (as with the rents you collect from your tenants). In a property downturn, you will need to be able to ride out the cash outflow on your income, this is particularly important as if you sell during a downturn much of your equity can be wiped out.
Some Important Tips for Investment Home Loans
A helpful point to remember in investment home loans is that investors are usually more interested in knowing what tax advantages they can gain. An example is when the financial advisor suggests that a tax advantage will incentivize their current assets such as their home. It will, basically, add money to their residence. Tax advantages also include deductions on the mortgage, property taxes, utilities, homeowners insurance and home maintenance. The benefit of being able to reduce mortgage insurance is also included in investment home loans.
Another investment option of investment home loans includes flipping. Flipping involves purchasing, repairing and reselling a property for profit. This strategy can work well in a rising market or if you are prepared to put in the time to find significantly undervalued properties or ones with large growth potential.
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If you would like to discuss obtaining an investment rate home loan or to discuss your other options please call us on 1300 760 718 or fill out the enquiry form in the left hand menu of this page.