Many houses in regional Queensland are under $500,000 with a positive cash flow. Image courtesy of realestate.com.au.

Owning an investment property can be very profitable, especially in the long term When purchasing an investment property, it is essential to understand what works for you. Consider your short and long term goals so that your decisions are suitable for your financial situation.
Buying an investment property is entirely different to purchasing your own home in that it shouldn’t have the same emotions because you are never going to live in it.

THE PLANNING PROCESS

Here are things you should consider before purchasing an investment property:

– Ensure you can deal with the repayments if the property is vacant for an extended period.

– Work closely with your mortgage broker to look at your current financial savings and equity to work out your borrowing capacity.

– Seek financial advice from an accountant to clearly understand cash flow, expenses, and the investment property’s impact on your tax return.

– Have a confident understanding of the type of property (house, apartment) you want to buy, the location, how much you want to spend, how much you can afford, the loan structure that works for you, the expected rental return, and the amount you can comfortably contribute yourself.

SETTING UP THE INVESTMENT

What you need to consider when you’re at the point of setting up the investment:

Negative gearing: the investment property expenses are greater than the rental income you receive, so you need to make up for the remaining amount. The loss is adjusted in your tax return, which usually results in a tax refund.

Positive gearing: when rental income from the property is greater than the expenses. The payment is added to all other income earned, and tax is payable at your taxable rate.

If your current property has equity, you may be able to borrow that amount for your investment property giving you greater tax benefits.

You get to choose Interest only or a principal and interest loan. Unlike an owner-occupier home loan, the interest on the home loan and all other expenses you will have to cover are tax deductible. You will be able to calculate the monthly repayments once you decide on the type of home loan you want and the amount you can borrow.