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QUESTIONS & ANSWERS
Not sure about something? Wondering about what happens if the unexpected occurs? You're not alone.
These are some of the most common questions our clients ask us.
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What do they mean by negatively, positively or neutrally geared property?
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What happens if a property is damaged or if I have a bad tenant?
What do they mean by negatively, positively or neutrally geared property?
The term negative gearing refers to a situation where your cash outflow to maintain an investment exceeds your cash income from the investment itself.
For example, with a residential property, if the mortgage payment on your property exceeds the rental income from the property; it is said to be negatively geared. In other words, the investment income is negative, which ordinarily allows you to claim the interest costs on your mortgage or loan as a complete tax deduction. Positively geared means the cash in exceeds the cash out. Neutrally geared means the cash in equals the cash out.
Is positive better than negative or neutral? Not necessarily, most positively or neutrally geared property in Australia today is found in smaller centres or rural areas which in itself is not a detraction but logically the capital growth over the medium or long term may not be as strong as in the major metropolitan areas. The bottom line is each situation needs to be analyzed and matched to each individual's situation.
What if I need money in a hurry?
Residential property loans can offer much flexibility. Today, if you need cash in a hurry you can actually draw the equity from your properties by having a revolving line of credit loan structure.
Also a cash flow management program that incorporates software allowing you to project your financial position into the future will allow you to make objective financial decisions.
If, in a worst-case scenario, an income stream is cut off for an extended period of time and there is no other redeemable asset base to turn to, the investment property can of course be sold to generate funds towards paying back the loan.
What happens if I can't find a tenant for my property?
There are really only two reasons for not having a tenant:
- The landlord is greedy
- The property is uninhabitable
If the market has changed and there is a protracted vacancy rate, that is, anything more than two weeks, it may be a matter of adjusting the rent slightly. Also properties whose financing is correctly structured could act as a safety net because if your income goes down, through a loss of rental income, you might incur more tax deductible expenses! However, with the right property management in place, vacancy should not be a problem. A good manager in the form of either on-site management or local real estate agent should have no difficulty finding suitable tenants with whom they can foster a long term relationship.
To avoid having an uninhabitable property, we recommend you buy new in the right location. In addition, Equity Resource's in-house management can be there to further support you for as long as you own the property. Also, the correct financial strategy can offer additional flexibility to cover any unforeseen increases or expenses. And, because you have accelerated the reduction of the principal balance of your mortgage, you should always have a ready supply of extra money from your revolving line of credit..
What happens if interest rates rise?
Whenever interest rates rise, the property market slows and rental incomes and property prices should also rise. Interest on investment properties should be tax deductible in the ordinary case.
So with increased rent and increased tax deductions, your cash flow over time can increase.
Most tenant leases are now tied into the Consumer Price Index (inflation rate) and allow landlords to increase the rent to keep pace with inflation.
You'll also notice when interest rates increase the development of properties slows down and if that happens in high migration areas of New South Wales & Queensland then rents will start to rise. Being an investor in property in those situations can be rewarding.
What happens if a property is damaged or if I have a bad tenant?
A comprehensive insurance policy will protect your property against most forms of damage. The cost of the insurance is minimal and should be tax deductible.
With effective property management, tenant difficulties should be non-existent or reduced to a minimum. Equity Resource's developments have had a high owner/occupier rate, (they can act as silent watchdogs), which ensures that the dignity and the value of the complex is maintained over the medium to the long term.
Professional property management can also contribute to minimizing the risk by only accepting tenants who have been carefully screened and had their references checked.
What happens if the government stops negative gearing?
In 1985 the government of the day drastically changed the negative gearing laws and caused chaos in the Australian rental market. Vacancy rates approached zero and rents increased rapidly. Those already owning investment properties were the happy recipients of the grandfather clause. In other words, they retained their benefits.
The Australian government has accepted the fact that rental property is a necessary component of a healthy market. Rents must remain reasonable as they relieve the strain on government-funded housing.
In addition, with the ageing of the Australian population, the government wants you to provide for your own retirement. There is no sign of the federal government dropping tax deductibility for investment expenses.
The ATO always monitors tax aggressive investments. While we are not your tax advisers, we take a conservative approach. Our focus is on a smart finance structure for your personal circumstances and the best kind of property investments for you. The tax outcome which follows that usually enhances the overall outcome.
How do I pick the best area for capital growth?
Rather than spending weekend after weekend looking, then driving from one side of the city to the other or even from one city to the next, in today's economy, it's time in - not timing.
Many of us would love to own multiple investment properties and already be financially independent.
The first aspects to be carefully considered are your affordable financial capacity and ensuring that it is structured correctly and comfortable for you. The key to Equity Resource's strategies is to create equity for you regardless of the economic conditions. Our consultants can demonstrate this to you with a customised strategy.
Equity Resource's professionals have access to detailed research on the future prospects of your property location and we are constantly rating areas according to their growth prospects.
Are units better than houses?
There is no simple yes or no to this question. There are financial factors that need to be considered ahead of any personal preferences.
If you are just starting to build a property investment portfolio, it can be debated that units with their lower land value content can be utilised more effectively in the initial stages of building a portfolio, because in most cases they will have tax features with enhanced value to investors.
Our consultants can assess your own individual needs more precisely, but remember the property should initially be considered only as an investment if you're not going to live in it.
Why won't investment advisers recommend property?
Because they can't make money from recommending property.
What makes Equity Resource different to other companies?
Equity Resource was initiated through the efforts of a group of professionals with national and international experience.
We utilise cutting edge technology to structure advanced strategies for Finance/ Financial Strategies/ Investment Properties and to show everyday Australians how to rapidly reduce mortgages and utilise their current resources to create wealth. Simultaneously, we maintain a transparent profile so that you, the client, can feel comfortable that you're dealing with a company of integrity.
We all know that today we live in a more complex economy. We pay more taxes than ever before, and to maintain an average Australian standard of living we spend our money on more things. It seems harder now than ever before to save money, and we're living longer than ever before. We all have a responsibility to plan and do whatever is necessary for our own financial independence.
If we're brutally logical with ourselves, we also know whether you're an individual or a business you have to have a viable management plan. Government statistics will tell you that 90% of all small businesses go out of business within the first 5 years, not because of the lack of start-up capital but because they didn't have a business plan.
It takes a smart person to make money and an even smarter person to hang onto it. Equity Resource will show you how and assist you to manage it through to success.
How does Equity Resource make their money?
Equity Resource is unique in that they can appeal to all segments of the market by offering you the choice of guiding your project through to settlement and then if you feel you can manage it from there on in, you then have that option.
This option is at no cost to the client as all of our fees are covered by banks and developers commissions and are at no impost to the client.
For the full comprehensive professional package, that includes the ongoing services such as cash flow and property investment analysis software, in-house support service, quantity surveyors reports, accounting, financial strategy monitoring and ongoing support for the life of you owning the property, Equity Resource charges a nominal percentage of the investment property purchase price for all of these services.
This is a once only fee and there are no other ongoing fees or charges. This fee is tax deductible to investors as a professional fee over 5 years and is included in the loan proceeds so it can be paid out at settlement.
Equity Resource is able to demonstrate with their software programs that with the additional tax deduction for this professional fee our strategy to reduce your principal mortgage balance will save enough interest to cover most, or all of the fee.
Our clients, therefore, overall invest little or no more than they would have done had they invested independently of us.
This provides the best of both worlds as we can provide a complete dynamic package that you can either take over, or sit back and relax and have us guide your strategy on your behalf.
