3 financial tips for portfolio success

“Keep up your equity in the property,†says Dr Andrew Wilson, senior economist for the Domain Group. “Even if you build equity over time, and you want to use that as a deposit on another property, make sure you keep your levels of equity high if you gear yourself from property to property.â€

As Dr Wilson encourages, building up your equity base rather than spreading yourself too thin is an important medium- to long-term investment strategy. The other important step is to create a clear financial map that will guide your property investment portfolio. Here are three financial tips to help you get there.

1. Get yourself ‘investment ready’

Visit your accountant or financial advisor and have them assess your current financial health and readiness to expand your property investment portfolio. Whether you conduct a financial ‘self-diagnosis’ or seek professional advice, you should review your:

• Personal budget – that is, your overall income versus living expenses.
• Current equity holdings within your existing investment property, home, assets (boats, cars and so on), superannuation, shares and savings.
• Existing investment property details, including rental yield, cash-flow analysis, mortgage structure and repayments, insurance and depreciation schedule.
• Current debt, including credit cards, mortgage and other loans.

If you are visiting a financial advisor, make sure they are accredited and have an Australian Financial Services Licence. Taking copies of all your financial statements relating to the above checklist will help expedite your financial assessment, as will having your personal property portfolio goals clearly established.

Overextending your debt load can put your existing equity at risk. Careful financial planning can help you build your equity over time and achieve consistent returns in the medium to long term.

“Don’t be tempted to use a large part of your equity for new purposes,†says Dr Wilson. “The 20 per cent 80 per cent model [the idea that you should maintain at least 20 per cent equity] that banks use is something you should also use as a minimum in terms of maintaining equity levels. The more equity you keep in your property the more secure it is and the greater the capacity for you to purchase downstream.â€

2. Tax deductions

What you can claim

One of the most attractive attributes of investing in residential property is the ability to claim significant tax deductions. You can deduct a wide range of rental property-related costs, including mortgage interest repayments, maintenance costs, insurance, council rates, land tax, property management fees and the depreciation of the property’s permanent fixtures.

It’s essential that you complete a depreciation schedule on your property’s assets and claim all that you are entitled to, so it may help to enlist a professional – particularly when it comes to multiple properties. While your tax accountant can complete your depreciation accounts, having a quantity surveyor inspect the investment property and accurately calculate your assets’ depreciation could save you significantly over the long term. Quantity surveyors specialise in assessing the valuation and depreciation of property assets.

Gearing

If you are considering owning a number of properties, you should evaluate whether you will positively or negatively gear. If your goal in building an investment portfolio is to earn a regular income, then positively gearing is the right way to go. On the other hand, if your goal is to grow your equity without increasing your taxable income – or if you want to reduce your taxable income – then you should consider negative gearing.

Capital Gains Tax

Coordinating any capital gain with a capital loss will offset the tax you are required to pay in that financial year, so it is important to keep this in mind when you buy and sell within your property investment portfolio. Capital Gains Tax (CGT) is only charged on properties bought after 20 September 1985, and if you hold an investment property for longer than one year the CGT charged is cut by 50 per cent.

3. Know your financing options

Mortgages

Along with evaluating your loan options – in terms of fixed-rate, variable or a combination of the two – you may also consider interest-only loans. Interest-only loans are popular with investors as they keep repayments to a minimum – you only repay the interest costs. This may seem like a great way to free up your cash flow, but there are risks associated with interest-only loans, because you are not addressing the principal debt and it takes longer to build equity in the property. You may also have the option of combining an interest-only loan with a variable or fixed loan.

Talk to your financial advisor if you are planning to use the equity in your existing investment property or home to fund a new real estate purchase. You should also be conservative when putting your existing equity on the line. Remember the banks’ rule of thumb: maintain 20 per cent of your equity at a minimum.

Self-managed superannuation fund

Using a self-managed superannuation fund (SMSF) to buy investment property offers significant tax advantages. Any rental income you earn will be taxed at a maximum rate of 15 per cent, which is much lower than most tax brackets. Additionally, any capital gain will only be taxed at 10 per cent after one year of ownership. There is considerable legislation governing the use of SMSFs to buy property and it is important to review these restrictions as they may prohibit you from pursuing this financing option.