How do you make your property investments work harder for you?
Earlier this week in Part 1 of this 2 part series we focused on generating an annual cash return for your investment properties through improved rental yield.
We looked at the different ways you can add value to your investment that would in turn generate more rental income for you.
Strategies included making a good first impression and focusing on the little things, furnishing the property, investing in bigger ticket items, renovation and securing longer term tenants.
Continuing on from this, let’s now turn our mind to reducing operating and holding expenses.
Minimise Ongoing Holding and Operating Costs
Below are my Top 5 cost savings tips for your investment property.
1. Shop Around for the Right Loan
Interest and associated borrowing fees are by far the biggest expense property investors incur.
If you take out the wrong loan, you could be thousands of dollars out of pocket.
This is not to mention your investment strategy could be undermined.
The present lending market is ideal for investors – low interest rates and considerable competition among lenders, especially the non-bank lenders.
So there is no shortage of options when it comes to investment property loans.
When choosing your loan, ask yourself the following questions:
- Is it competitive and cost effective – taking into account the interest rate and ongoing fees?
- Is it flexible – can you make accelerated or lump sum payments easily?
- Is it aligned with your investment strategy – will it support your investment time horizon? For example, you wouldn’t take out a 10 year fixed rate loan when you expect to sell the property in seven years.
- Does the borrowing structure support your tax position?
- Is an interest only or interest and principal loan the best option?
2. Carefully Select Your Property Manager
The right property manager can make a big difference to the success of your investment.
Attracting and retaining the right tenants, rent collection, overseeing ongoing repairs and maintenance work, and carrying out regular inspections are some of the key responsibilities of a property manager.
This not only helps maximise your rental income, it also assists in protecting your property from damage and the effects of wear and tear.
When selecting your property manager you should do your research.
Review and compare commission levels and other costs (which could significantly eat into your rental income if they are unreasonably high), and also review their track record, knowledge of the market, renter preferences and their connections with quality and competitively priced tradespeople.
3. Maximise Your Depreciation Allowance
Most investors understand the concept of depreciation but not everyone gets the maximum benefit, meaning they are not minimising their tax liability.
In general terms, properties built after 17 July 1985 are eligible for a depreciation allowance of 2.5% of the original construction cost a year, for up to 40 years. So, for a dwelling on land that cost $200,000 to build, you can claim $4,000 a year depreciation as a tax deduction.
For all properties, fixtures and fittings can be depreciated in line with the rules set by the Australian Taxation Office (ATO).
Interestingly, not all allowable depreciation claims are made because owners are not always aware of what can and can’t be included, especially for older properties.
This also includes major renovations of a capital nature. For this reason it’s a good idea to appoint a quantity surveyor who can inspect your property and prepare a depreciation schedule. This will normally be acceptable to the ATO.
It’s important to remember that depreciation (and other property expenses) can only be claimed for the period during which the property was rented or available for rent, so this needs careful attention.
In addition, the tax treatment of repairs and maintenance and capital improvement is quite different – repairs and maintenance is an immediate deduction while capital improvement is a possible depreciable item.
Your accountant or financial adviser should be able to help you maximise your allowable deductions and, in conjunction with a quantity surveyor, they should be able to identify all depreciable items.
4. Keep Up-To-Date With Maintenance
This is a case of spending money to save money.
Fixing a small problem now can save you a lot of money down the track.
For example, a broken or cracked roof tile is easy and cheap to replace but if it is left for a significant period of time it could turn in to major internal damage due to the effects of rain over time, as could leaking or worn plumbing.
Therefore, fixing a small issue before it becomes a big problem is better for your wallet.
Additionally, failure to adequately and reasonable fix maintenance problems on a timely basis could not only breach the lease contract but it could also lead to a loss of good tenants, neither of which would be a desirable outcome.
It’s also a good idea to take adequate property and landlord insurance to help protect you against major repair bills and damage caused by renters.
5. Adequate Tax Planning
Before buying your investment property it would be wise to seek independent tax advice to ensure the transaction is structured in the most tax efficient way.
This means ensuring the purchase is made through the appropriate entity – through a trust, company or as a personal transaction, and in consideration of protecting the current CGT concession.
In addition, it’s important to ensure that all allowable property expenses are duly claimed to help reduce your tax expense.
The ATO provides a useful list, which includes items such as:
- Advertising for Tenants
- Bank Charges
- Body corporate fees and charges
- Council Rates
- Electricity and Gas
- Gardening and Lawn Mowing
- Insurance (Building, Contents, Public Liability)
- Interest on Loans
- Land Tax
- Lease Document Expenses (Preparation, Registration, Stamp Duty, Legal Expenses)
- Mortgage Discharge Expenses
- Pest Control
- Property Agent Fees and Commissions
- Quantity Surveyor’s Fees
- Secretarial and Bookkeeping Fees
- Security Patrol Fees
- Servicing Costs (e.g. Servicing a Water Heater)
- Stationery and Postage
- Telephone Calls
- Travel and Car Expenses (in relation to rent collection, inspection of property and maintenance of property).
By combining strategies to increase rental yield and minimize holding and operating costs, you’ll not only go a long way to making your investment property more financially viable and less of a cash flow burden while you’re renting it out, but you could add greatly to its appeal and sale price when it comes time to sell.