1. Only buy properties that pay you at least 4% rental yield
In order to navigate the current economic climate, your investment strategy should prioritize properties that yield at least 4%. This will allow you to retain more of your earnings, typically between 2-3% after expenses, and help cushion any effects of interest rate fluctuations.
While the ultimate goal of property investment is to see growth in value, it’s important to ensure that the property can sustain itself financially. Without positive cash flow, the investment won’t be sustainable enough to reap the rewards of long-term growth.
2. Only buy new properties
Making improvements, renovating and maintaining an investment property can quickly lead to high expenses. It is better to focus on constructing new buildings that require minimal upkeep and generate positive cash flow from the beginning, rather than those that demand costly and ongoing maintenance. The most significant benefit for property investors is depreciation, as it is the only expense that does not require actual payment. It is a loss on paper that is covered by taxes that would otherwise go to the government. The entire cost of constructing a house is tax deductible.
3. Holding property must cost less than 10% of your income
In my opinion, it is advisable to ensure that the expense of maintaining a property does not surpass 10% of our income after taxes, irrespective of the prevailing interest rates. Although interest rates are beyond our control, we can mitigate the risk by making judicious choices while purchasing properties. Personally, I am not in favor of selling properties unless it is absolutely necessary. I would only recommend selling if the cost of upkeep exceeds 10% of our take-home pay.
4. Don’t buy units or townhouses
Incurring expenses and lowering rental yield on an investment property can be easily done through body corporate fees. This is not a concern for freehold land and houses, as they do not have this extra cost, unlike units and townhouses. Additionally, it is common knowledge that the land holds the true value of a property, which is not something that can be found in units.
* picture source from:https://www.apimagazine.com.au/news/article/7-steps-to-success-for-your-property-portfolio
5. Buy at the affordable end of the market
Property investors often neglect to consider vacancy rates, but it is a crucial factor in achieving a profitable return and steady cash flow. It is essential to have a tenant who can pay rent for most of the year. However, if the rent is too high, the pool of potential tenants decreases. Thus, purchasing affordable properties, with rents that do not exceed 30% of the average income in the area, is crucial. These properties should be at or below the median house price.
6. Pay interest only
If you haven’t fully paid off your residence, it is illogical to reduce the principal on investment loans that generate revenue and are eligible for tax deductions, while you still owe money on your home loan that does not provide rental income or tax benefits. It is not in the best interest of the bank to have this arrangement either, hence it is advisable to opt for interest-only loans for all your investment properties. Only after you have cleared your home loan, should you consider paying off your investment debts.
7. Lodge a tax variation when interest rates are high
Fluctuations in interest rates are a common occurrence. However, if we hold onto an investment property for a period of 10 years, we will most likely experience a normal inflation environment with interest rates ranging between 4 to 5 percent for six to eight years. There will be periods of high interest rates for 1 to 2 years and periods of low interest rates for the same duration. In the current scenario where interest rates are high, property investors can benefit from lodging a tax variation. This enables them to receive their tax refund of $12,395 progressively throughout the year by paying less tax in their weekly, fortnightly, or monthly pay instead of waiting until the end of the year.
The information provided is 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. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article 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.