Can I afford an investment property?

Wondering if you can fit an investment property into your budget?

Your Mortgage’s Investment Property Calculator can provide an estimate of the income and expenses associated with owning an investment property.

From rental yields to negative gearing, it can measure the profit or loss associated with an investment property purchase, helping you decide whether it’s the right wealth-building move for you.

Should I buy an investment property?

Property investing is often viewed as lower risk than investing in other assets, such as stocks or managed funds. It’s also typically considered to be quite rewarding.

However, it’s important to understand that investing in property isn’t a guaranteed way to make money.

As with any other investment vehicle, you should ensure you understand the pros and cons of property investing to manage your portfolio effectively and reach your financial goals.

Can I afford an investment property?

Affordability is a top concern for many would-be property investors. Unlike other forms of investing, entering the property market typically requires a large sum of money.

Most banks and lenders require a property investor to have a deposit of at least 10% of the property’s value, with deposits of less than 20% likely attracting Lenders Mortgage Insurance (LMI).

And that’s just the beginning. When buying an investment property, investors will likely incur additional costs such as stamp duty, conveyancing fees, and mortgage application fees.

Once you’re in the market, it’s crucial to have the financial capacity to achieve your investment goals.

Identifying your priorities and creating a rough outline of your long-term financial strategy can be a beneficial way to prepare for buying an investment property. You can devise an investment strategy on your own or seek advice from a financial expert.

The investment home loan a property investor chooses can significantly impact their investment strategy. Here are some of the most competitive options available on the market right now.

How does this calculator work?

At Your Mortgage, we want to ensure you have the right tools to help you plan for your future.

This calculator can provide an estimate of how much profit you might expect to yield from an investment property, after covering your mortgage repayments and other property-related expenses.

If you’re not expected to earn a profit, it will consider whether you could realise taxation benefits from negative gearing.

Here’s the information you’ll need to input in order for the calculator to work its magic:

• The price of your ideal property

• How much you expect to borrow

• The interest rate on your ideal investment home loan

• Your annual salary (to calculate any potential tax offsets)

• How much rent you expect to charge each week

The calculator will also ask you to input estimates of how much expenses like those below could come to:

• Council rates

• Strata fees

• Insurance

• Repairs and maintenance

It’s important to note that the calculator assumes the interest rate, taxes, fees, and other costs related to your investment property won’t change during the time you hold it, which is unlikely in real life.

How much tax do I have to pay on rental income?

There are quite a few taxation aspects property investors should be aware of.

Of course, an investor will likely pay tax on the purchase of a property, in the form of stamp duty. After that, any rental income will be considered taxable income.

Depending on where an investor lives, they might also need to pay land tax and, of course, council rates. When they sell, they might need to pay capital gains tax on any profit made.

However, property investors making an annual loss on their property might be able to utilize negative gearing to offset their loss.

Here is a more detailed breakdown of some of the taxes you might face if you own an investment property:

1. Income tax
   You will need to pay tax on any rental income you earn. However this can be offset by deductible expenses, such as home loan interest.

2. Capital gains tax
   This tax is payable on any profit you make when you sell your investment property. If you’ve lived in the property for a period within six years of selling, however, you might be able to avoid the tax. Further, if you own an investment property for 12 months or more you might be eligible for a 50% capital gains tax discount.

3. Property tax
   More commonly known as council rates, this tax goes straight to the local council. The amount you’ll need to pay will probably depend on your locality and the property’s land value.

4. Land tax
   Both state and federal governments impose this tax. Land tax is calculated based on the combined, unimproved value of the land you own. It applies at different rates in each state or territory.

The good news is you’re generally allowed to deduct certain property-related expenses from your tax. Property investors can claim deductions for several expenses.

Key things to consider when it comes to deductions include:

1. Acquisition and maintenance costs
   Acquisition and maintenance costs can typically be deducted against other taxable income, whether in the year they’re incurred or bit-by-bit over the following years.

2. Depreciation allowances
   Property investors might also be able to minimise the tax they pay by claiming depreciation on newly-purchased items such as appliances, blinds, carpets, furniture, and hot water systems.

3. Negative gearing
   Finally, when the annual cost of owning an investment is greater than the return a person is receiving, their property could be ‘negatively geared’. While negatively geared investments are, by nature, loss-making, their owner can generally deduct that loss from their gross income, reducing their tax liability.