Millions of Australians own an investment property. It’s a profitable journey that can set people up for a very comfortable future if done right from the start.

Step 1: Talk to a broker

Many people put off speaking to a home loan broker until they’ve found a property. A smarter strategy is to talk to the broker first. They will help you determine your goals and show you which path will get you there fastest.

Some of the things a broker will discuss with you include:

• Different strategies, from paying down your current mortgage to leveraging equity for an investment property
• Your risk profile and what you’re comfortable with
• Possible cash flow and ongoing costs
• Modelling different capital gain and rental scenarios
• Negative gearing

Once you know how the numbers shake out, you can go property shopping with confidence. At Independent, we recommend Clarity Financial Group. They’ve a great track record and are structured so they get the same commission regardless of what lender you choose.

Step 2: Find a good contender

Some properties are better suited for investment purposes than others. It all comes down to what your investment strategy is. Our property management and sales teams can help you identify which properties would suit your needs.

Some things you may want to consider include:

• What’s the rental demand for properties of this type in that area?
• What appeal does the suburb have to potential tenants?
• What are the current rental rates for similar properties in that area and how have they changed in the past few years?
• How have property values changed over time in that area?
• Are there any future development plans for the area that will impact rental demand?
• What future improvements could you make to the homes/block that will impact its value?

Step 3: Assess affordability

The most important thing to know once you’ve found a potential property is, can you afford it? To find the answer, you’ll need to understand how to determine the cash flow and taxation implications.

Cash flow

• The cash that flows to and from the property. You put money in to cover costs associated with running the property. You take money out by receiving rent.
• When costs are greater than the rental income, the property is generating negative cash flow.
• Negative cashflow is common, especially in the early years. Under normal circumstances, the rental income will go up over time and the property will become cash flow positive.

Approached sensibly, the long term gains of investing in real estate can make it very worthwhile. However, always make sure you know what the cash flow is before buying a property.

Costs to include in your calculations:

• Mortgage
• Council rates
• Strata or body corporate fees
• Property manager fees
• Insurance costs
• Utilities
• Repairs and maintenance
• Depreciation on assets

Your broker can help you work out the likely cash flow so you can see what the net out-of-pocket cost to you will be every month. They will also explain how depreciation impacts the cash flow, what deductions are available to you and what you can do to maximise your returns.

Negative gearing

If your investment property costs more to run than you earn in income, it has a negative cash flow—also described as being negatively geared.

Negative gearing:

• Allows you to offset your losses from your investment property against your other income
• Reduces the amount of tax you pay

To negatively gear your property you have to make a loss on it. This means that you must ensure you can meet the costs of running the property. Over time, as your investment provides a positive cash flow, you will receive extra income but pay tax on it.

Deductions

Investors in rental properties are entitled to tax deductions on their investments. The more deductions you have, the more likely that your property will make a loss on paper so that you can negatively gear it against your other taxable income. The kinds of deductions you can claim include:

• repairs and renovations
• advertising for tenants
• depreciation
• insurance
• property agent’s fees
• council rates

Be wary, though. The Australian Tax Office (ATO) scrutinises property investors closely so it's important not to claim more than you're entitled to. Some of the deduction criteria are especially complex, so always get professional advice from an accountant or other qualified financial advisor.

Independent has a range of trusted contacts we can give you if you’re looking for a financial advisor.