Investing in property
Investment in property can either be through indirect investments like property trusts and other managed funds, as discussed in Chapter Six, or by direct investment in bricks and mortar. Direct investment in property can include residential property, such as houses, home units and holiday homes for renting. It can also include an investment in commercial properties, such as shops, offices, factories and warehouses. Property is a long-term investment. You should consider the implications carefully when deciding if this type of investment is suitable for you.
What are the risks?
- Property values can increase or decrease, depending on economic conditions.
- Keep in mind good tenants may be difficult to find—you may have long vacancy periods and damage to your property may occur.
- The property must be actively managed either by yourself or through a property manager.
- Expenses may be high and occur unexpectedly.
- Your money is not easily accessible.
- It may be difficult to sell your property quickly.
What are the advantages?
- Well-chosen and managed properties provide regular rental income and potential for capital growth.
- It is sometimes possible to rent out properties when the rental income is guaranteed for a period, for example, Defence Service Homes.
- Many of the costs associated with owning and maintaining the property are tax deductible.
- Property investments are tangible ‘bricks and mortar’.
Taxation on real estate investments
In general terms, any rental income derived from an investment property forms part of your assessable income and expenses incurred in deriving that income are allowable deductions against any income. A deduction may also apply for depreciation of the assets.
If you receive social security or Veterans’ Affairs payments
Assets test—the home that you normally live in is excluded from the assets test, but homeowners have a lower assets test limit than non-home owners.
The value of any other property you own, including holiday homes, is fully assessable as an asset. It is valued as the amount of money you would get if you sold the property today, less any money you owe on it, unless the debt is secured by the home in which you live. In this case the amount of the debt is not taken off the market value of the second property.
Income test—income from real estate is assessed as the actual amount received from the property, less certain expenses for maintaining it.
Your home as an asset
Your home is an asset. The value of your home, less any debt, is the amount of equity that you have in your home. There are a number of accommodation options to consider if you are looking for ways of freeing up equity in your home. These options may give you investment and lifestyle choices that you may otherwise not be able to consider. For example, if you live in a large home, moving into a smaller home or a retirement village unit may leave you with extra money to invest, resulting in increased income and an improved standard of living.
Centrelink does not count the home you live in as an asset. Only one home can be exempt from the assets test. Changing your accommodation may have implications for any income support payments you are receiving so you should always check with Centrelink or the Department of Veterans’ Affairs before entering into any arrangements involving your home.
Retirement villages
Retirement villages accommodate people aged over 55. Residents may be in good health or may need help in daily living. Retirement villages are popular with people who need more security, support or company but who want to maintain their independence.
Retirement villages are funded by residents’ payments, loans or donations. The amount you have to pay on entry to a retirement village will depend on a number of factors and will need to be carefully considered before contracts are signed. In some villages, the entry contribution is the purchase price of the unit. You will also need to pay ongoing fees and charges for services and facilities.
[ top ]
Granny flat arrangements
A granny flat can be a separate self-contained dwelling built on someone else’s property or a right to accommodation for life in a private home. Granny flat rights are usually family arrangements.
You may create a granny flat interest if you contribute money or other valuable assets in exchange for your granny flat, but your granny flat legally belongs to someone else, even though you have secure tenure.
You should always consider having legal documents drawn up to protect your security of tenure and to avoid any problems if your family situation changes.
Selling and leasing back your home
These are commercial arrangements where you can sell your home, but continue to live in it for an agreed period, often for life. Part payment is made when the agreement is signed. The balance is paid when you leave the property. Sometimes the agreement involves a stream of payments for a fixed number of years. These plans are complex and you should investigate them thoroughly ensuring that you seek independent advice.
Home equity conversion loans/reverse mortgages
If you qualify for this kind of loan, you can borrow specified amounts of money against the security of your primary residence. In some cases these loans may be secured against investment properties or non-owner occupied properties. Usually, there is no requirement to make regular repayments until your home is sold or it is no longer occupied. While this type of loan can never be in default due to lack of payments being made, other conditions of the loan can place it in default.
To qualify, the providers require you, or you and your spouse in the case of a couple, to be of a minimum age—commonly 60 years. Depending on the provider, you may be able to borrow amounts as a lump sum, regular payments or a combination of both.
While repayments do not have to be made until the property is vacated or upon your death, the interest is compounded and the amount of the debt increases over time. Other charges such as an application fee and a monthly charge can also apply. These are included with the loan and compound interest is charged. Some providers offer a ‘no negative equity guarantee’ which means that, if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against your estate or other beneficiaries. However, the guarantee is dependent on you meeting the terms and conditions of the loan such as keeping your home insured and well maintained.
The effect of compound interest
If you borrow $30 000 (including application fee), and assuming a fee of $10 is charged monthly and the loan interest rate is 8.5 per cent, at the end of ten years the debt would have grown to approximately $71 860. This assumes the interest rate remains constant— a big assumption as usually a variable interest rate applies. Other assumptions that need to be made could include the potential value of the property over time, the cost of maintenance etc. All strategies and transactions have risk. Assumptions that are made in providing projections could be very different from the reality of the situation.
It is prudent, and sometimes a requirement, that independent legal and financial advice is sought before proceeding with such a loan. Discussing the decision to access this type of loan with your family members could also be sensible so they can be aware of the consequences of such a transaction and, if desired, other alternatives may be investigated. For example, you may need the equity in your home later on for another purpose, such as funding a place in an aged care home.
Pension Loans Scheme
If you get a part-rate Age or Service Pension or an Income Support Supplement or you can’t get a pension because of the income or assets test, you may be able to get financial help under the Commonwealth Pension Loans Scheme. If you own real estate in Australia, you may be able to obtain a loan that increases your fortnightly pension payment up to the maximum fortnightly pension. You will not qualify for the Pension Loans Scheme if you can’t receive a pension because of both the income and assets tests.
Your loan will be secured by registering a statutory charge against real estate that you or your partner owns. The debt, including accrued interest, will be recovered from the money received when the property is sold. If you choose, the loan will not have to be repaid until your death. Should you choose the option of repaying the loan after your death, you should discuss the matter with the beneficiaries of your will so that they are aware of the charge.
For more detailed information on some of these options
The Department of Families, Community Services and Indigenous Affairs has published additional information that may be of help to you. This information can be found at www.facsia.gov.au Centrelink FIS Officers may also be able to discuss these arrangements with you.