Buying an Investment Property

Before you buy

Property can be a complex form of investment. It is a physically structure people live and work in that requires maintenance and running costs and involves more financial commitment and supervision than other 'passive' forms of investment.

Investment properties also compete in the marketplace with other forms of investment like shares, can be more exposed to economic highs and lows, and more difficult to sell quickly.

Before you decide which type of property investment is right for you, prioritise your needs. This should be done in consultation with your accountant, financial adviser and solicitor. There are a range of property investment options:

  1. Property offering a high rate of return and a positive cash flow (more commonly commercial rather than residential investments)
  2. Property offering a lower rate of return (often a loss) but providing positive tax incentives to be offset against other forms of income (this is called negative gearing).
  3. Managed investment, controlled by a third party, offering a guaranteed rate of return for a contractual period of time (most commonly hotel/serviced apartments).

The type of investment property most suitable for you will depend on your personal financial situation. Your accountant or financial adviser will help you determine the option that best suits your needs and situation. You should not be mainly persuaded by media, friends and advertising promotion.

Be sure of valuations or appraisals you are given regarding the property - ensure you do your homework and research the value of the property yourself and get an independent valuation. Don't just rely on valuation or appraisals provided by the seller or their agent.

When determining how much you can afford to spend, consider all fixed outgoings such as loan repayments and interest, council rates, insurance, land tax, property management and body corporate fees. Also consider variable costs such as interest rates and bank charges. Stamp duty is considerably higher for investment properties.

Research the effects of income returns and capital gains thoroughly before your purchase.

Allow for interest rate increases and unforeseen repairs and maintenance in your calculations. It is important you have sufficient funds available to quickly rectify any problem. Your tenant has rights and can take legal action against you if you do not provide a safe and satisfactory accommodation/work environment.

Who should you buy from?

Over the last few years property investment sales have increased dramatically. Developers may contact you directly with investment opportunities.

It is common for marketing companies appointed by developers to conduct investment planning seminars to attract new investors. Many accountancy, legal and financial planning companies also invite their clients to participate in "in house" investment schemes to promote tax benefits through owning real estate.

If you are purchasing an investment property, you should fully investigate the property and likely returns before making a commitment to buy. Consumer protection legislation attempts to protect you from misleading conduct, false or misleading representations or unconscionability under the Trade Practice Act 1974 and Fair Trading Act 1989.

If you are approached by an investment marketing company about an investment that provides you with guaranteed returns or tax benefits, you should seek the independent, informed opinion of your accountant or financial adviser. Don't buy property sight unseen as photographs or video can never tell the whole story.

This includes properties offered to you over the internet, or as part of an investment sales seminar. Avoid the temptation to join a property investment scheme because you feel pressured by colleagues or friends.

If you are buying a property in unfamiliar area, contact local real estate agents and conduct your own market research to ensure you are paying a fair market price. Some companies have marketed investment properties at premium prices to interstate and overseas buyers who aren't aware of local property values.

If you are purchasing through an investment marketing company or developer, organise an independent valuer to review the market value of the property, particularly if the seller is also providing finance.

Independently verify all information given to you regarding market rental, outgoings and potential capital growth. Beware of agents or investment marketeers promising or predicting unsubstantial high rates of return and growth (if predicted returns seem too good to be true they probably are a lie).

In the case of guaranteed rental returns, assume the properties may not provide the same rate of return after the rental guarantee has expired.

The Australian Taxation Office will usually allow you to claim a tax deduction for depreciation. Ensure your agent/builder/developer provides a depreciation schedule at the time of settlement so you can avoid paying for a quantity surveyor to prepare a schedule for you.

Knowing the hidden costs

There are disclosure laws that require licensed agents and their salespeople to fully inform you of the nature and extent of any financial or other benefits they may receive from people they refer you to (ie finance broker, lawyer or valuer). You do not have to use the services or advisers recommended to you by the agent. It is wise to seek your own independent expert advice.

Agents are also required to disclose the amount, value or nature of any benefit any person has received, receives or expects to receive in connection with the marketing purchase or sale of the property.

This information is found in the Selling Agents Disclosure to Buyer PAMD Form 27c so please read it carefully (see Forms Page). These forms are also available in translated version (Chinese traditional, German, Green, Italian, Spanish and Vietnamese) from www.fairtrading.qld.gov.au.

If the amounts disclosed on the form are in percentages, consider the true cost - 4% may not seem alot, but on a $300,000 house that's $12,000.

Other disclosures

If you are dealing with a licensed property developer marketing residential property, they must disclose:

  • whether the property developer holds an interest of atleast 15% in the property;
  • any relationship and the nature of the relationship the developer may have with professional services connected with the sale (eg. valuers and financiers);
  • whether the developer will receive any income or benefits from that relationship as a result of the sale; and
  • the amount, value or nature of any benefit any person has received, receives or expects to receive in connection with the marketing, purchase or sale of the property.

When you are ready to buy

In Queensland it is standard practice to negotiate contracts, so negotiate rather than accept the price. Check any residential property sales contract you are about to sign has a Warning Statement PAMD Form 30c as its front page - this is a legal requirement (see Forms Page).

If you are buying an investment property to be managed by a third party (such as a hotel or serviced apartment operator) you must first be given a prospectus and certain disclosures under the Managed Investment Act 1998. Consider these and seek legal advice before signing any contractual agreements with the developer or agent.

Be wary of accepting advice from professional experts closely associated with the seller.

Follow the advice in the warning statement - seek independent legal advice and an independent valuation before you sign the contract.

When you are ready to sign

Seek your own service providers (solicitors, valuers, finance agents and building and pest inspectors) to assist you in the purchase.

Check the sales contract is accurate and you agree with its contents including conditions that give you adequate avenues to cancel. If you are unsure, check with your solicitor before you sign the contract.

For residential real estate transactions (except auctions) there is a five business day cooling-off period to give you time to think carefully before you buy a property.

If you wish to shorten or forego the cooling-off period, ask your solicitor to issue you with a certificate, Lawyers Certification PAMD Form 32a (see Forms Page). Carefully consider the risk you take by shortening the cooling-off period.

If you want to cancel the contract during the cooling-off period, write a letter to the property developer or agent involved and make sure you deliver it before the period ends. You will be refunded your deposit less an amount equal to 0.25% of the purchase price of the property.

Timeshare Investments

A timesharing scheme is a scheme where participants are entitled to use, occupy or possess, for two or more periods, property to which the scheme relates and that is to operate for not less than three years.

Real property timesharing schemes, for example, commonly include title-based schemes in which a purchaser becomes a tenant in common with the right to a share of the real property.

There are several risks involved in buying timeshare investments. If you are looking to buy into a timeshare investment to make money from it further down the track by "on-selling" it, be aware that it can be very hard to sell a second-hand timeshare, and they can have low resale values. These risks are not openly disclosed to prospective buyers.

If you are considering buying a timeshare investment:

  • be wary of pressure selling techniques;
  • before investing make sure your decision fits into your overall investment strategy;
  • understand the risks involved - remember that all types of investments have cycles of profitability and cycles of losses and these cycles can last for years;
  • do your homework - find out as much as possible to make sure you really understand the pros and cons and weigh the advantages and disadvantages against your financial goals;
  • make sure you understand the tax and social security benefit (eg. pension) issues;
  • read and keep all documents you receive;
  • seek independent legal advice before you purchase; and
  • check the entity has complied with all their legal obligations, (e.g disclosures)

Visit www.asic.gov.au for more information.

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