The whole point of investing in property is to create lasting financial security.
So why does it often seem like you have to spend a lot of money in order to make any as a landlord?
Investing in real estate is a costly business but there are plenty of strategies you can use to maximise your money and ensure your dollars are working as hard for you as possible.
So, let’s look at 5 of them:
1. Opt for interest-only loans
An interest-only loan is usually the best option when you’re starting out as an investor because it allows you to maximise your borrowing power while you’re working your way up.
To retire with financial independence requires you to have a number of properties in your portfolio, so you need a loan structure that will help you to obtain the greatest borrowing power and equity access possible.
Interest only loans allow this to happen, as they minimise your monthly repayments in the early years while you’re at the stage of accumulating properties.
This will in turn allow you to buy more properties sooner, and push you towards a bigger portfolio – and ultimately, financial independence.
2. Don’t use the same lender for every property
When building your investment property portfolio, it’s a good idea to try and use a different lender for each property you own.
There are many reasons for this, but the biggest one is avoiding the consequences of cross-collateralising your assets.
For example, if two of your properties are cross-collateralised (their loans are linked) and you wish to sell or refinance one of them, then the lender could potentially request that you pay off the other loan (or part thereof) before allowing you to move forward.
Similarly, using the same lender will mean that your properties are valued as a single asset. As a result, one failing property could sabotage your ability to leverage against your entire portfolio.
The lender may also put a limit on your borrowing options, and could impose limits on your LVR.
In other words, you put the ball firmly in their court and give up a lot of your negotiating power.
Instead, spread your investments around different lenders and let them vie for your business by maximising what they can do for you!
3. Take advantage of depreciation
Whilst not strictly a finance tip, this does relate to effective money management.
To increase your tax deductions as an investor, you need to take advantage of depreciation deductions.
Depreciation is reimbursement for the inevitable deterioration of an investment property.
This can be categorised into capital works, which include the long-lasting pieces as well as the structure itself, and into plant and equipment. The latter deals with objects that are removable, like curtains.
The costs involved to prepare a depreciation schedule with a quantity surveyor range from $500-$800, but this generally allow you to deduct several thousand dollars at tax time every year.
Also, keep in mind that the cost of preparing a depreciation schedule is tax deductible!
Note that if your property was built earlier than July 1985, different rules apply: you can still claim depreciation, but only of plant and equipment.
Speak to a professional quantity surveyor for advice and clarification; your bank balance will thank you for it!
4. Consider using Lender’s Mortgage Insurance
Do you realise you can still buy a property with only a 5 or 10% deposit?
This means you need less of your own money to be able to buy your property sooner, but you’ll have to buy the right type of property in a location the banks feel will be likely to deliver capital growth and you will need to take out Lender’s Mortgage Insurance (LMI).
By the way…LMI protects your lender (not you) in the event you can’t make your mortgage repayment. With the ability to pass on shortfall risk to the insurance company, lenders are more willing to accept a lower deposit.
So, by reducing the deposit required, you could purchase your home or investment property much earlier.
While this comes at a cost, which is tax deductible to investors) realistically, in today’s market, paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time if prices rise dramatically in that period of time.
And the good news is the banks will often lend you the extra money for the LMI>
5. Set up buffer accounts to cover property costs
As a landlord you will experience bumps in the road: whether it’s the air conditioning system that fails, the bathroom that floods or the oven that desperately needs to be replaced, there will be unexpected expenses that crop up!
To avoid being stressed out (and financially stressed) by these expenses, I suggest you set up a property ‘buffer’ account with enough savings to get you through unexpected expenses.
This would ideally be set aside in mortgage offset account, which would be connected to your loan, so you can gain the interest benefits.
An offset account is a stand-alone transaction bank account that is linked to a specific loan account, like your investment property loan account.
This can be a very effective tool in reducing your loan interest and keeping funds separate for tax purposes.
Rather than earning interest on savings, the savings balance is theoretically deducted from the loan balance, which in turn, reduces the interest charged to the loan.
Another advantage is that the Australian Taxation Office does not consider this as earning interest income and so benefit is achieved without additional tax expense.
Further, an offset account can reduce the term of the loan and allows funds to be kept ‘at call’ and used for any purpose.
If you’re in need of a full financial overhaul, speak to a specialist mortgage broker or an independent property strategist to see what options are available to maximise your situation.
Remember that the greater your disposable income, the greater your borrowing power – and the greater you’ll your wealth creation journey will be!
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.