Important Considerations Before Turning Your Home Into an Investment

Are you considering capitalizing on the thriving property markets and enhancing your home?

Are you contemplating a relocation to another state for work-related reasons?

Are you considering the need to upsize your home to accommodate the kiddies or downsize now that they’ve left the nest?

Perhaps you’re thinking about converting your current home into an investment property when you decide to move?

Holding onto your home offers several distinct advantages. You can avoid incurring various fees associated with selling, such as agent’s commission and advertising costs. Additionally, it provides a sense of security, knowing you have a place to return to if your plans or circumstances change.

However, before making the leap from owner-occupier to landlord, there are essential factors to consider and questions to ask yourself.

Capital Gains Tax

Failing to seek professional advice could result in an unpleasant Capital Gains Tax (CGT) bill when you eventually sell the property. Unlike owner-occupiers who are exempt from CGT on their primary residence, if you’ve rented out the property, you might face CGT obligations upon selling.

The Australian Taxation Office (ATO) grants a 6-year grace period to determine which property will be considered your primary residence once you move out. However, it’s crucial to consult with your financial advisor or accountant to understand the potential implications before putting up the “For Lease” sign in your front yard.

Capital Growth Potential

If your current home is situated in a low-growth area, you might want to consider selling it and purchasing a new “investment-grade” property that offers greater potential for capital growth.

When making this decision, carefully assess the fees and costs associated with buying and selling, and balance them against the likelihood of the property’s value appreciation and the duration you plan to hold it as an investment.

Although it’s impossible to predict the market’s future performance with certainty, you can make an informed estimate of which option presents the best opportunity for a promising profit in the long run.

Is your property attractive to potential tenants?

A large family home with an extensive, high-maintenance backyard may not be attractive to budget-conscious students, just as a studio apartment in an outer suburb surrounded by large properties might not be the best fit for an urban professional couple.

It’s essential to ensure that your property aligns with the preferences of the local tenant market. Renting out a property that doesn’t appeal to the local tenants could lead to extended vacancies and costly advertising expenses.

Engaging in conversation with local property managers can provide valuable insights into what local tenants desire. If your property doesn’t meet the market demand, you might want to consider exploring investment opportunities elsewhere.

How will you finance the property?

If you have substantial equity in your home, you may consider using it to purchase your next property. However, before taking any steps, it’s essential to seek advice from a proficient finance broker to ensure the proper structuring of your finances.

Using your new investment property (formerly your old home) as security for your loan does not automatically make the interest on the loan tax-deductible. The tax department considers the purpose of the loan, so it’s critical to set things up correctly.

Some investors mistakenly believe that by taking a loan against their old home to buy a new property, the loan will become tax-deductible since the security is now an investment property. Unfortunately, this is not the case, and the loan’s purpose determines its tax implications.

Getting the financial aspects right is a crucial element in successful investing and can significantly impact your future wealth. It’s wise to seek expert advice from a finance professional rather than attempting to tackle it yourself unless you are well-versed in finance matters.

The Property market of your suburb

As an owner-occupier, you may not have paid much attention to the number of neighbors who are renting their homes. However, as a new property investor, it’s crucial to gather essential statistics such as vacancy rates, median rents, and the percentage of renters versus owners in your area before converting your family home into an investment property.

This information can be found online, and reaching out to a few local property managers can provide valuable insights as well. Being well-informed about the rental market in your neighborhood will help you make better decisions for your investment venture.