Renting out an investment property
30 March 2022
Are you looking to buy an investment property? Or maybe the plan is to convert your existing home into a property for rent?
It’s a big decision. So, before you take the plunge, here are a few things to consider.
To manage or not to manage?
If you’re looking to rent out your investment property on a long-term basis, you may want to consider using a property manager. This service is most often provided by a real estate agent’s office and they will charge a management fee that constitutes a percentage of the rental income received. The property manager will also check the references of all applicants for your property, a service that can help you find the best long-term tenants.
But, if you're planning on leasing the property out to family or friends, a property manager may not be necessary. A private rental arrangement may save on management fees, but be aware of the potential for complications. While we all love our family and our friends, it can sometimes be problematic to mix them with business. If a dispute develops within such a framework, the consequences can be uncomfortable.
If you’re charging rent at a market level, the Australian Tax Office will regard that money as taxable income, even if the tenant is a friend or family member.
But if you charge your family or friends a less than market rental rate, the tax implications are more complicated. You may need to apportion the expenses you claim as tax deductions. If there’s any uncertainty, we recommend consulting a qualified tax professional.
Long-term tenants or holiday rental arrangement?
A property management firm will advertise your rental property online and through other advertising methods.
You may decide that a long-term agreement is desirable because it provides peace of mind through regular rental payments over the contract period. But if you’re buying your investment property to use as a short-term rental through Airbnb or another holiday home website, you’ll generally need to manage the booking process yourself. You may find this requires time that, as a busy medical professional, you don’t have.
If you end up using the property yourself for a period of time, you’ll need to apportion expenses accordingly when it comes time to claim expenses on your tax return.
Let’s say, for example, you live in your beach home over one fortnight per year while renting it the rest of the time. This means it will only be generating commercial rent revenue for 25 out of 26 fortnights per year. Therefore, when you add up your annual expenses that arise from your ownership of that property, you’ll only be able to claim 25/26 of that amount, or 96.16%.
With an investment property, not only is the rental income applied to your annual tax return as income, but you’ll also likely owe Capital Gains Tax (CGT) when you sell the property.
It’s wise to have your home appraised whenever its use converts from primary place of residence into an investment property, or vice versa.
An appraisal by a credentialed property valuer will help ensure your valuations are correct when you calculate how much CGT you owe.
If you’ve used the property as your primary place of residence during part of the time you’ve owned it, you may not have to pay CGT on the entire increased value of the property.
An investment property will form a significant part of your investment portfolio. That means you should never scrimp on the maintenance expenditures required to keep your property in good condition. It’s beneficial for you to retain its maximum value.
A good property manager should provide you with monthly summaries of income being received and any expenses they’ve paid on your behalf. At the end of the financial year, make sure they send a comprehensive summary that will enable you to cross-reference revenue generated by the property with outgoing expenses. Your accountants will thank you for making their jobs much easier.
Landlord insurance is also a wise investment for rental property owners. It will protect you against financial loss from damage to property, theft and tenants who fail to pay what they owe.
Are you getting the most out of your investment property
An investment property can be a fantastic financial option that generates annual rental income and yields long-term capital growth that is realised when the property is sold.
Rule number one is to keep good records! Make sure you file away every incoming rental payment and every outgoing expenditure receipt, including:
- advertising costs
- bank fees
- body corporate fees
- cleaning fees
- council rates
- building depreciation
- electricity and gas bills
- gardening expenses
- loan interest costs
- property management fees
- repairs and maintenance expenses
- water rates.
Record keeping is one of the big advantages of using a property management firm. They’ll do most of the work for you – for a fee, of course.
For your out-of-pocket expenses, we have a solution that can help. Bongiorno can set up an online document storage facility that keeps photographic records of your receipts and saves relevant emails.
If you want to give your investment property a facelift, or update that tired bathroom or kitchen, there are tax implications to keep in mind as well.
The ATO makes a distinction between capital improvements to your property that are not deductible and general maintenance expenditures that you may deduct from your taxable income.
We recommend you talk with a qualified financial adviser before undertaking major renovation work on your investment property.
We're here to help
If you have any questions or want to book an exclusive AMAV member complimentary meeting, please phone 03 9863 3111 or email email@example.com.
Ricky Caldow BCom (Acc/FinPlan), Cert.IV FMB, TPB Tax (financial) Adviser
Senior consultant | Bongiorno Group