So called ‘negatively gearing’, where interest costs are maximised in order to create a situation where the expenses incurred in owning a property exceed the income earned, is almost as popular as the traditional Aussie bar-b-que. More than 1.5 million Australians own negatively properties and the number is increasing on a daily basis.
The key reason that Australians like negatively gearing is because our tax rates are relatively high and any losses generated from property ownership can generally be offset against other sources of income. While you are overseas you might not have much other income to offset against property losses, but you can carried forward those losses and use them against future income or capital gains.
For example, if you were overseas for say 10 year and you built up $100,000 of carried forward losses generated by a negatively geared rental property, the $100,000 could be claimed against income earned in any of the years when you return to Australia. You can elect which year in which the losses are utilised which means you claim the losses in year when your income is highest.
What sort of returns can I expect?
The latest Housing Price chart produced by the Reserve Bank of Australia (see below) indicates that Sydney and Melbourne have been the leading property markets over the last 4-5 years.
Clearly, the growth in property prices fluctuates and it is possible to lose money investing in property if your timing is out. For example, an investor who bought in Brisbane around 2009 could have lost money if they then sold around 2012.
Property investing is not a ‘one way street’ so you need to make sure you have sufficient equity in any property you purchase.
Australian banks have progressively tightened lending requirements – the Loan to Value Ratio (LVR) is a key measure of how much a bank will lend. LVRs typically start at 80% and then reduce depending on a range of factors. Under certain circumstances it is possible to borrow more than 80% of the value of the property you are purchasing, but this simply means you are taking on extra risk.
Some investors prefer property as an investment to shares or managed funds because they like a more tangible ‘bricks and mortar’ style investment. It is generally easier to borrow to buy property. Added leverage can boost long term returns … but also brings within it added risks.
What deductions can I claim?
The Rental Properties 2014-15 booklet available from the the Tax Office web site (https://www.ato.gov.au/Forms/Rental-properties-2014-15/) provides an excellent overview of what deductions you can claim.
One way to maximise your deductions is to obtain a depreciation report which itemises all the deductions you can claim in terms of division 40 and division 43 of the Income Tax Assessment Act 1997. Companies such as Deppro (https://www.deppro.com.au/) and BMT Quantity Surveyors (http://www.bmtqs.com.au/) offer a depreciation schedule service on a fee for service basis.
How can I get a loan?
You can approach a bank directly to borrow money or you can use a mortgage broker. If you need access to an Australian mortgage broker located in Australia or overseas, please drop us a line and we can put you in touch with a reputable broker.
Should I borrow in foreign currency to buy an Australian property?
The general rule of thumb is to keep your assets and liabilities in the same currency. If don’t take this approach, you will expose yourself to currency risk. As an example, if you borrow say USD 500K to buy an Australian property worth AUD 1 million and the bank has allowed you a maximum Loan to Value Ratio of 70%, the maximum you can borrow in AUD is AUD 700,000. The USD 500K loan might start out being the equivalent of AUD 650,000, but if the AUD falls against the USD, your maximum LVR may be breached. If there is a breach of the limit your bank could ask you to top up the security or pay out the loan. Either way, you could be put into a difficult position simply because you have opted to borrow in a currency other than AUD.
Some people will say “I’m paid in USD, so it is Ok to borrow in USD”. However, being able to service the mortgage is only one part of the equation. You also need to be able to top up the security if the currency moves against you.
If you do decide to borrow in a foreign currency you should consider hedging strategies to minimise the risk. Or don’t take the risk at all …
Summary
The chart above indicates that Australian property prices generally rise over time. However, there is a significant level of variability from one city to another and there have been periods of negative growth in some cities.
Key points to consider:
- You need to do your homework in terms of where you are going to buy and what type of property you are going to buy.
- You need to ensure that you don’t borrow too much or too little. If you aren’t sure how much gearing you should have to maximise your tax position, you should seek advice on this matter.
- You need to invest for the long term so as to increase the probability that you will make a capital gain and so as to minimise the impact of transction costs.
- If you are going to buy more than one property, they make sure you diversify – for example you could buy properties in more than one city or you could even diversify into property overseas (after taking account of the risks that apply to overseas properties).