Keep your helmets on, investors – this is probably only a short break in hostilities.
We’re still under attack. And the battles, on several fronts, aren’t likely to be over for some time yet.
With the stock-market shenanigans, which at the end of August looked like they would right themselves, but then resumed stupidity.
The month before, it was a pincer movement on property investors by authorities and lenders.
Stock markets are beasts no-one controls, but residential property is an investment over which you do have some control, particularly when it comes to the performance and tax-effectiveness of your own position.
We can’t control whether property is in a bull or bear market. But while you’re in the trenches digging in your position anyway, let’s have a refresher on maximising your property investment’s return.
The changes forced on the banks by the Australian Prudential Regulation Authority, in recent months, has increased the costs of holding investment property. Higher interest rates, even if tax deductions, still come out of your back pocket.
So, if your cashflow is suffering, consider the following.
Have you got your investment property loan on principal and interest, or interest only?
The most tax-effective way to pay your investment loan is to pay interest only, particularly if you also have a home loan.
If you’re an investor who also has a home loan, then it is the home loan you should be attacking the principal of, with any spare savings you have, as the debt is not tax-deductible. And freeing up payments to interest-only from your investment can do two things.
First, it can help you pay down your home loan faster. Second, it will keep your tax-deductible debt higher.
For example, monthly repayments on a $450,000 investment loan, at 4.8 per cent, are $2361 for principal and interest, and $1800 for interest only. That frees up $6732 a year to pay down your home loan faster. Over five years, that has decreased your home loan by $33,660 – powerful stuff. But would actually be more, given the compounding nature of the savings.
Further, but harder to calculate given individual tax positions, is that the investor has also kept their legitimate tax deductions higher, increasing their tax return. This is worth thousands of dollars over time.
There is some talk that there will be an “APRA Round 3” attack on investors, potentially later this year. Some industry insiders believe that if there is, it’s possible banks might stop interest-only repayments and force investors onto principal and interest repayments.
This would be a dramatic, and painful, change for investors. And might be harder for banks to implement, given existing contracts.
Are your rents at market rates? Often, it feels easier to have a good tenant stay, rather than risk them walking by imposing a rental increase.
And sometimes that’s true. One week’s lost rent, plus potentially advertising fees, can cost upwards of $500.
Ask your agent if your rent is at market rates. The agent will know … and so will the tenant. If it’s under market rates, and the tenant knows it, they will probably opt to pay an extra $5 or $10 a week, rather than face the hassle of moving.
An extra $5 a week is $260 a year, while $10 a week is $520 a year, less any extra agent’s fees you’re paying.
Consider improving or updating your investment. Sure, there’s a cost. But an improvement here or there might justify higher rents.
Put your bank to the test. Interest rates for investor loans have been, largely, increased by most banks. But not all have. Is your bank still giving you the sort of rate that you would expect for a loyal customer? If not, stop being loyal! Speak to a mortgage broker, or your bank, to see if a sharper rate might be on offer.
Direct residential property, unlike shares, is an asset over which you can exert some control, over both your costs and your income.
And if authorities and banks are going to continue to hound property investors, exerting positive control over substantial assets such as an investment property becomes an imperative.