Should you turn your home into an investment property?

There comes a time in most home owners’ lives when they need to change homes. The reasons can vary – you might be upgrading to make room for a new family, downsizing now that the kids have flown the nest, or simply relocating due to a new job.

The question that comes into everyone’s mind when changing homes is “Should I sell my house or rent it out?”

It’s a complicated question to answer. There are financial, tax and emotional considerations that you need to take into account to make sure that you’re making the right decision.  It takes a lot of hard work, and if you get it wrong you could be at risk of being fined by the ATO, or even worse – overextending yourself and ending up losing your home.

Here at Hunter Galloway, we’ve helped many of our customers navigate this difficult decision to make sure that they get the best outcome.   Click the button below to book a free, no obligation consultation with one of our experienced brokers who can discuss your options and make sure that you make the best decision for you and your family.

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Firstly, you need to consider whether this decision makes sense for you financially.

If this is going to be your first investment property, you may not be familiar with the risks and costs of renting out your home. You will be paying two mortgages, and while rent should cover most of the repayments on your investment property, there may be times when you don’t have a tenant or other unexpected costs. Make sure that you have room in your budget to allow for these unexpected costs.

Beyond that, you will also need to take into account the tax implications of your decision.

For example, if you have paid off a lot of debt on your original home and are planning to leverage this equity to finance your new residence, you will have an investment property with little to no debt, and a new residence with a large debt.

This is the opposite of what you want. Interest on investment properties is tax deductible, while interest on your residence is not.

In cases like this, you are likely better off selling your current property and using the proceeds to make a deposit on your new residence, which means a smaller debt on your non-deductible loan. If you still want to get an investment property, you can use the equity to leverage a loan for a different investment property (which will be 100% tax deductible).

A simple switch like this could save you thousands of dollars every year.

You might want to keep your current property as an investment because you are attached to your home and can’t bear the thought of selling it. This is a normal feeling – there are usually a lot of important memories that are linked to our homes.

But if you really love it, can you bear to see strangers living in your home? What happens if you get bad tenants who trash your home and cause irreparable damage?

Owning an investment property can be stressful enough without the added worry about someone ruining a house you feel so strongly about. In that case, you might be better off with a clean break  and you should sell your house and look for investment opportunities elsewhere.

The mindset behind buying property for investment and buying a home are very different. When investing, your decisions should be 100% logical (just like any other investment decision). When buying a home, emotion is almost as important as logic.

The chances are that you bought your home because it means something to you, not necessarily because it is in a high growth area or in an area with above average demand for rentals. The areas that we choose to live in do not always deliver the greatest returns on investment.

Before committing to keeping your current home as an investment, do some research to see what kind of properties you could buy for a similar amount of money elsewhere. This will help you make sure that you maximise the returns on your investments.

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If you’ve decided to rent your home out, there are several key factors that you will need to optimise to ensure that you get the best return on your investment and don’t end up in an awkward financial situation.

The best loan structure for your investment depends on whether you will have positive or negative gearing.  Do you expect your property to earn more income in rent than the cost of repayments, rates and management fees? In that case, it will be positively geared. On the other hand, if you don’t expect to recoup the cost of your repayments and other expenses, your investment will be negatively geared.

It’s important to think about this, as it will affect the decisions that you make when applying for your loan and setting up your structure.

If you bought your residential property with a spouse or partner, you most likely put the loan under both of your names.  This makes sense for a residence for many reasons, including making sure that your share automatically goes to your partner if anything happens to you.

Investment property is different. In order to minimise your tax burden, it is usually better to have the property under only one of the couple’s names. If your property is positively geared, it’s better that the property is in the name of the lower income earner – that way you are taxed less on the profits. If your property is negatively geared, it makes more sense to have the property in the name of the higher income earner. This will mean that they can make all of the tax claims and get more tax back (as they are likely paying a higher marginal rate).

If you keep your existing home under the same loan structure as you bought it with, you may lose out on these very useful deductions. The cost of this could be far greater than you think – up to tens of thousands of dollars.

When you have an investment property, you are entitled to claim depreciation on building costs, fixtures, fittings and furniture. If you are switching over from an owner-occupied property to an investment property, you will need a quantity surveyor to estimate the present value of your building, fixtures, fittings and furniture. Once you switch over, you can claim any balance of depreciation costs and gain substantial tax breaks.

Many banks and lenders now offer investment property loans. These have different rates, criteria and benefits to residential loans. You can also choose to apply for an interest-only loan which means that you can pay any extra income into your new home, minimising the non-deductible interest you need to pay.

You should also investigate the possibility of refinancing your existing loan to make sure that you benefit from some of the structuring advantages and other things mentioned above.

With hundreds of different loans available on the market, it can be extremely challenging to search through all of the different options and find the loan that is best for you. Luckily, you don’t need to do it alone.

Hunter Galloway has an experienced team of brokers who live and breathe finance. By working with us, you can rest easy knowing that we will do all of the hard work for you. After an initial assessment to find out your needs, our team will work tirelessly to make sure that you get the best loan for your unique situation.

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If you’re thinking about your next investment opportunity, feel free to give us a call. As experienced property investors ourselves, we’re happy to share an expert opinion and make sure that you get all of the basics in place before moving forward.

During our Free assessment, we will analyse your own unique circumstances and discuss all of your options for financing. We will help you maximise your borrowing amount and minimise interest rates. We will find you the best deal by comparing your options across over 20 different lenders.

Depending on your investment strategy, you are going to need a lot of professional help. If you’re developing property, there are town planners, survey engineers, surveyors, builders, project managers, architects, lawyers, agents, financiers and valuers. Choosing the wrong professional can be a costly mistake – we can help you find the right people to work with.

Here at Hunter Galloway, our clients come first. The best way to make sure you are getting the right loan is to engage the services of an experienced mortgage broker. As experts in finance, we can compare and contrast your options across many lenders to make sure that you are getting the best deal. Call us on 1300 088 065 or book a free assessment to find out what options are available to you.