Costs involved with investment properties

AS the title suggests, how much does it cost?
And how does that trade off against what you can do in terms of negative gearing?

Im contemplating relocating, and renting out our house as an investment property.

Ive heard you can claim interest as a tax deduction, Im assuming this is only if you're paying it (as in if the tennants rent covers 80% of the mortgage, the 20% that I'm paying is all I can claim for)

Are there any potential traps?
Im quite apprehensive,lately anything I touch turns to @#$%%

We have an investment property - we used to live there and then used it to buy closer to the city.

The main tip I have is get a good property manager. Ours keeps changing and it gets very annoying as they don't know the history of our property.

Our property is now about 10 years old so it is starting to incur maintenance costs. That is a potential expense and whilst you can negative gear that, it's still $$ out of your pocket.

Any interest you pay on your mortgage is tax deductible. The house itself is tax depricatable. Expenses such as pm fees, maintence, improvements may fall in either the deductible or depreciatable category depending on what it is. I would recommend keeping good records and tracking down a GOOD "property wise" tax accountant, to help figure it out. Too many accounts don't actually understand all the in's and outs of property investment and can cause problems with the ATO claiming the wrong things.

Positively geared, means you are making a profit off the property after all expenses are taken into account. You need to pay tax on this profit.

Negativley geared, means you are making a loss after all expenses. This loss can bring down the amount of tax you have to pay.

What kind of mortgage do you have? Does it have an offset account? Does it have a redraw facility? If it has a redraw facility have you ever used it?
An offset account is great and means that you should have no issues with the interest on your mortgage for tax purposes.
A redraw facility on the other hand can cause serious problems with the ATO. If you have used the redraw facility for non-investments purposes (ie, personal use) then unfortunately that % of the mortgage interest is no longer tax deductible. It can get pretty complicated, hence having a good accountant to help sort it out.

The other thing to keep in mind is the capital gains tax implications, when you go to seel the property. If you sell now, you will not have to pay any capital gains tax. If you turn it into an investment property you have six years before you incur capital gains tax, unless you buy another primary place of residence in that time, in which case you will have six months to sell after buying before incurring capital gains tax.

How old is the property?

I am pointing all these things out, but you will have to run the numbers to figur out if keeping and renting or selling would make more sense financially. Personally, I believe in never selling real estate once you own it, if you can help it - but you definitely need to run your figures.

There are other things to consider such as the emotional side of things, are one someone who becomes attached to a house and would hate to see it damaged? Because although the majority of tenants are reasonable people, the fact is they are unlikely to treat you house with the same respect you would. Wear and tear is higher in rental properties then in owner occupied properties, and although bad tenants aren't as common, they do exist and it is a possibility that at some poin you will get stuck with one. LandLord insurance is a neccesary expense IMHO. This will cover any rental defaults, or damage caused by bad tenants. Hopefully you would never need to claim, but the majority of LL's I know have had to make a claim of some sort over the years. I have also know LL's who don't insure, but they have a large enough asset and cash base to cover such costs themselves (not many people are that fortunate).

Hope this helps. :)
Feel free to pm me if you have any q's. I also know of a good property investment forum that is sually very good at answering questions if you would like me to pm you the address.

Thanks Misty, I have to spread the love :)
I too think you should hang on to any property where possible.
Thats why Im looking in to this as an alternative to selling the house.
I will talk to my tax accoutant as he does property and see if its something he can look at, but if you could PM me the website I will have a look at that as well.
Our current loan has a redraw activated but we'd be refinancing the property before making it an investment property - does that make a difference? Surely redrawing on the loan would only come in to play while its an investment not while its our primary residence?

WRT Capital gains tax, what happens if you move back in to the property within the 6 years, and use it as your primary residence again?
If ever use it as an investment again does that 6 years continue from where you left off, or would it include the time where you lived in the property as a primary residence?

I'll have to ask my DH for some advice and get back to you, he looks after our investment property. But I do have to say, shop around for a good property manager! Ours has been terrible, we asked her over the past 12 months to chase up insurance for a cracked bench top. She left the company last Friday without arranging it (we and our tennants harrassed her constantly). She also left without giving the new lease agreement to our tenants, even though DH emailed/called her constantly about it. She promised she have it all arranged before she left, but didn't :rolleyes:.

We're seriously thinking about ditching the agents and letting DH manage it himself!

We have only just brought a new house as our primary residence, so we decided to keep our other house as an investment property. It is all completly new to us, so I dont have much advice at this stage. We have a great accountant who has explained it really well, and what records we need to keep etc for tax time.

We ended up deciding to manage the property on our own, as I couldnt justify the agents fees when I was prepared to do the work. The initial forms are really straight forward, application forms, rental agreement, condition report and bond lodgement. I got the forms from Consumer Affairs (we are in Vic). We found our own tenants without advertsing, where we live has a huge demand for rentals atm so it wasnt hard. We did ref checks etc and so far it is all going really well.

It was always going to be a see how it goes thing, and if it doesnt work we are happy to sell the house. Neither DP or I are attached to the house so there isnt any emotional connection to it.

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Our current loan has a redraw activated but we'd be refinancing the property before making it an investment property - does that make a difference? Surely redrawing on the loan would only come in to play while its an investment not while its our primary residence?

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Unfortunately, yes it does matter. We have made this mistake with our PPOR. Also be careful if you are refinancing not to increase the amount of the loan above what you would need to pay for the refinance of the original mortgage, because any extra pulled out will not be considered part of the "investment purposes" even though it is secured against an investment property.

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WRT Capital gains tax, what happens if you move back in to the property within the 6 years, and use it as your primary residence again? If ever use it as an investment again does that 6 years continue from where you left off, or would it include the time where you lived in the property as a primary residence?

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If you move back in before 6yrs is up, then no CGT is payable. You could then move out in the future and the 6yrs starts again - it is not cummulative. The only time a problem arises is if you purchase another property to move into in that time. You cannot claim more then one property at a time as a PPOR for taxation purposes - luckily if you are moving between two houses you don't actually need to "decide" which is the PPOR, until such a time as you sell one of them, however the other will have CGT applied for the whole period.

Thanks.
Its entirely possible we would be moving back within the six years.
The redraw part sux.
We have a fixed loan and dont generally pay more than the normal amount, but I did have a sum of money that was sitting in that account for a while, to offset the interest thats all been taken out now. Oh and then there were the three occasions where the bank transferred money from our day to day acct to the mortgage without telling us and I had to move it back again. :(

ANyway its all usedful info to know, so thank you.