Bricks and Mortar Real Estate Investment Tips

Welcome to another instalment of Bricks & Mortar, where our panel of experts answers real estate property investment questions from API readers. Published in the December Australian Property Investor real estate magazine.

When to sell real estate?

Question: My husband and I are both working at the moment, however, I’m going to be starting 12 months’ maternity leave in January. We think we might need to sell one of our investment real estate properties (we have six) to help ease the financial load during this time. My question is, from a CGT perspective, would we be better off selling the property while we’re both earning an income or should we do it when I’m at home with the baby? The property is in both our names, 50/50.

Answer: Congratulations on your pregnancy. I hope everything goes smoothly for you. From a CGT perspective, it’s best to wait and sign the contracts in a financial year where you have a lower income so that any gains made on the sale of a property are added to a lower base income and not a higher base income. By the way, and for what it’s worth, another option instead of selling an investment real estate property is to use a line of credit (LOC) to help with the cash flow. This LOC will mean that your debt will increase over this time but twhere the funds are used to pay for property-related expenses and mortgage repayments, the interest should still be tax deductible.

This real estate investment strategy enables people to keep their properties at times like this instead of triggering the enormous costs of selling and seeing their portfolio decrease, and allos them to keep all future gains in real estate value on the properties in question.

Dale Gatherum-Goss

Can I claim the interest on a real estate investment property

Question: I have an investment property in real estate with about $68,000 left on the loan. Long story short, the interest I currently incur isn’t deductible against income against the property. If I were to “refinance” this real estate property loan as part of opening a new loan which I require for the explicit purposes of buying another investment property, will the interest earned on the sum total of the loan (i.e. the $68,000 plus the amount of the new property) now be deductible against income from the new and/or both properties?

Answer: No unfortunately the Tax Office follows the money in cases like this to see the purpose of the new home loan and how the funds were used. So, any new house loan would be apportioned between tax-deductible debt and non-tax-deductible debt I’m afraid.

Dale Gatherum-Goss

Is it too late to invest in real estate?

Question: I am a 53 year old nurse who works full-time and I’m concerned my superannuation won’t provide me with enough money to enjoy my retirement years. I currently earn $55,000 per annum and have almost paid off my home which is worth about $300,000. My question is, is it too late for me to invest in real estate or property to help secure my financial future? If it isn’t too late, what should my real estate strategy be going forward?

Answer: No, it’s not too late. Yours is a common scenario where an individual realises that relying on superannuation alone isn’t going to deliver the retirement lifestyle they were hoping for. Provided you are five to ten years away from retirement, you can still capitalise on your income and home equity in your existing real estate property to build wealth.

To maximise that wealth creation through real estate property investment at this point in your life will require a very unemotional and businesslike approach in order to maximise your capital gains. Your selection of the right real estate property asset is crucial and you should be concentrating on only one area – the high-growth inner urban areas 2 to 12 km from a major CBD – where scarcity value, high demand and low supply will underpin your real estate investment. By focusing your property strategy on capital growth you will build and control home equity. And it’s controlling equity that’s the key to attaining financial independence.

Don’t be daunted by the higher prices in these areas. One very well chosen, more modest real estate asset – such as an apartment – can outperform the wider marketplace and inflation, not to mention larger, lower growth properties in middle to outer suburbs. Seek independent financial advice on the best loan package for your circumstances.

Next, seek truly independent real estate property investment advice to ensure you do get the maximum capital gain and good, long-term rental income. These two advisory areas should be kept separate. Don’t waste any time before seeking the appropriate advice. Steer totally clear of any “get rich quick” property real estate investment schemes. Many people seeking to rapidly top up inadequate superannuation have been tempted by these to their financial detriment.

The safest way to invest in this real estate asset class ist o take an unemotional, longer-term very well advised view.

Monique Wakelin

Real Estate Valuation discrepancy

Question: Why is there such a big difference between a real estate agent’s appraisal and a valuer’s valuation of a property or home, particularly when it’s for the bank? I had an agent give me an assessment of the value of my home before getting my loan but the bank valuer said it was worth a lot less.

Answer: It probably comes down to a question of the instructions and motivations of the valuer and the real estate agent. The valuer is instructed by the lenders to provide a realistic assessment of the real estate market value of the property as they find it on the day of inspection. They can’t take into account future improvements or presentation issues you may attend to if you were to place it on the real estate market. The lenders simply want to know a “safe” amount they should use as security, so in the unlikely event they have to take over the property, they’re covered.

The real estate agent’s appraisal isn’t bound by these instructions. Often the reason for providing a free appraisal is as a marketing tool to try to gain your favour and ultimately a listing. Therefore, it’s in their best interests to be “bullish” about their opinion of the market value so that you’re more positive and inclined to list it with them. Remember that real estate valuers are totally independent and have no vested interest in your real estate property or home.

Phil Grahame