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Our steps to residential property investment cover some of the most important things you need to know to become an astute investor, from the types of loans available, to your obligations as a landlord. We explain how residential property can work for you including information about the legal, financial and taxation aspects.

Knowledge

Why Property?

The adage, "invest in bricks and mortar", seems to hold as true today as it has for centuries. Historically, real estate property prices appear to have not fluctuated as dramatically or as frequently as share prices. Although property may rise and fall in line with supply and demand, or because of changes in the economic climate, the property investor has usually not been subjected to the frequently dramatic highs and lows of the stock market.

On the other hand, in times of uncertainty, cash may be thought to be one of the safest investments. Even so, investors will sometimes see its value reduced by the effects of inflation. For these reasons, many people look to property as a more desirable investment alternative.

Consider the benefits

Apart from avoiding the previously outlined extremes of shares and cash as investment options, the investor has the potential to gain a number of valuable benefits by choosing to put his or her money into property.

These include worthwhile taxation advantages, good income return, the potential for capital gain in the medium to long term, security, and the perceived low risk that has made this type of investment attractive to so many people.

As a result, many people look to property investment as a way to fund their retirement, while others find it an effective means of reducing their taxable income through negative gearing.

Preparation

Buying a Property?

Before purchasing an investment property, you should establish its real worth. This can be achieved by comparing the asking price with that of similar properties in the same area and by discussing your needs with real estate agents.

These days, most real estate agents subscribe to a computerised property index service and can access a list of the most recent prices paid for neighbouring properties. If you can find a real estate agent who will provide this information you will have a reasonably accurate idea of the price you should pay.

Of course, your own negotiating skills will also come into play, but the final price will depend, not only on the property's true value, but also on how much the owner is actually willing to accept.

How much can you borrow?

For residential investment properties, principal and interest home loans, we can lend up to 95% of the purchase price or our valuation, whichever is the lesser. For Asset Lines, residential investment properties, interest only home loans, we can lend up to 90% of the purchase price or valuation, whichever is the lesser.^*

However, if you have other residential property that can be used as additional security, we will lend you the full purchase price of the proposed investment property.

To help you determine the amount you could borrow, check out our Pre-approval Calculator. By inputting your current income and expenses, it will estimate approximately how much you can borrow.

For Home Loans and Asset Lines, over 80% LVR Lenders Mortgage insurance is payable. Where Lenders Mortgage Insurance is payable for Asset Lines terms and conditions apply.

Flexibility

We offer you a wide range of loans suitable for investment property buyers.

• Variable Rate Loans
  With a variable rate loan, the interest rate rises or falls as the market fluctuates. So whichever way rates move, it will be reflected in your loan repayments.
• Back to Basics Home Loan
  With a Back to Basics Home Loan, the interest rate is variable but is set below the standard variable rate. It allows you to take advantage of the low rate without locking into a specific term. Your repayments must be set up through electronic transfer.
• Fixed Rate Loans
  A fixed rate loan allows you to budget accurately, because your interest rate remains the same for the term you choose. We have 1, 2, 3 and 5 year fixed rate terms available at very competitive interest rates.
• Split Rate Loan
  You can choose to 'lock-in' an interest rate on part of your loan by selecting a fixed rate while still allowing for flexibility by keeping part of the loan on a variable rate.
• Bridging Loans
  A temporary loan pending sale of an existing property.

Getting cash back when you need it.

With a Suncorp residential property variable rate investment loan, you are able to withdraw extra payments from your home loan that are in excess of your normal repayments via our cashback^* facility to use for whatever you want. By making these additional payments, you will be making sure you pay off your investment loan as soon as possible. This facility then allows you to use these funds at any time should you need money for school and university expenses, a holiday or renovations.

This feature is available on Suncorp Home Loans, excluding the Fixed Rate Loans. The minimum withdrawal is $1,000 and you must leave at least one month's repayment in your loan account.

A fee of $20 for each Cashback withdrawal applies. Your first Cashback fee will be waived each calendar month, effectively providing you with 1 free Cashback withdrawal each calendar month.

Request a Cashback online from an existing Suncorp home loan.

How early can I repay my loan?

You can pay off your loan as quickly as you like. There is also a Loan Finalisation Fee for the finalisation of your loan.

Adaptability

Negative Gearing

Briefly, an investment is said to be negatively geared when the income it generates is less than the borrowing costs and outgoings.

For example, if you take out an investment loan to purchase a rental property, and the interest on the loan (together with the associated costs) is greater than the gross rental income you receive from it - in other words, you make a loss - then the property is said to be "negatively geared".

Usually, such a "loss" can be used to offset your tax liability from other sources, such as income derived from salary, wages, a business operation, and income you may have made from other investments.

To illustrate the point, let's look at a hypothetical situation. We'll assume you have a taxable salary for the year of $55,000. For the purposes of the illustration, we'll also assume that in addition to your salary you receive an extra $8,000 in rental income from an investment property, bringing your taxable income to a total of $63,000. However, to purchase your investment property, you have taken out a Suncorp loan of $120,000 at 7% p.a. interest.

In this situation, your taxable income at the end of the first year may be calculated as follows:

Basic illustration only. This does not include other income items such as interest or other deductions which are dependent upon individual circumstances. Subject to current tax laws.

From this example, you can see, that while investing in a rental property which could make capital gains for you in the medium to long term, you have reduced your annual taxable income by $2,400.

It should be noted however, that when you eventually sell your investment property, there may be a capital gains tax liability if you make a profit on the sale, or a capital loss (able to be carried forward and / or offset against other capital gains that you may make) if the sale proceeds are less than the purchase costs. The amount of any capital gains tax payable may be subject to a 50% discount for individual investors.

A word of caution

You should never make an investment simply because of the seemingly attractive taxation benefits to be gained through negative gearing. Your investment should ideally offer positive benefits and the opportunity to gain in its own right.

Although the concept of negative gearing may appeal to some investors, it is wise to take into account the support that is required from your existing income and not to rely totally on the expected cash flow from the property itself. You should also seek advice from your accountant or other professional adviser on the taxation and financial implications as any benefits will depend on your personal circumstances.

Business Acumen

Income Tax Deductions*

As indicated previously, it may be possible to make considerable tax savings through investing in residential rental property. Following are a few of the items for which taxation deductions can be made, however it is always wise to check with your accountant before making a claim of any nature. You will have to keep documentary evidence of your outlays to substantiate your tax claims.

* Subject to current tax laws.

Interest

If you take out a Suncorp loan to purchase an investment property you may claim the interest on the loan as a tax deduction. Similarly, you may be entitled to claim the interest on any loans used to purchase items for use in the rental property such as a refrigerator, furnishings or carpet. The important thing to remember is that you can only claim a deduction for interest that is incurred in order to earn income from the rental property.

Other Deductions

In addition to interest payments there are a number of other investment property costs that are tax deductible and may allow you to make significant tax savings.

Building allowance

On any residential income producing property used for assessable income producing purposes built after September 1987, a building allowance of 2.5% of the original qualifying construction cost may be deducted every year for 40 years while you own the property, regardless of the resale price. The allowance is 4% (25 years) if construction commenced on or after 18 July 1985 and before 16 September 1987.

Depreciation

Assets such as appliances, furniture and fittings, carpets, curtains, etc. can be depreciated over their effective lives and used to offset income from other sources.

Outgoings

Outgoings include costs which are incurred in managing or the running of your residential investment property. These include agent's commission, the cost of professional services such as accountant's and solicitor's fees, insurance, rates, repairs and maintenance, cleaning, gardening - plus the cost of your travel and car expenses for inspection of the property.

However, if the property is not available for rent for the full year, some of these expenses may need to be apportioned on a time basis. This is particularly important to remember if the property is a holiday home or unit and is reserved from time to time for your own, or your family's, use. Again, you should check with your accountant or professional adviser on the deductibility of outgoings.

P.A.Y.G. taxpayer benefit

If you have a negatively geared investment property and are an employee having regular P.A.Y.G. instalments deducted from your wages, you can apply to your local tax office for a reduction in your P.A.Y.G. withholding tax instalments using an income tax withholding variation (ITWV) form. We recommend that you seek advice regarding whether this may suit your own circumstances from your tax advisor prior to making any such application, as there can be penalties imposed in the event of mistakes.

Accountability

Capital Gains Tax

Capital Gains Tax or ordinary income tax may apply when you sell an investment property for more than you paid for it. Where Capital Gains Tax applies, the amount due is calculated on the difference between the purchase price and the sale price (certain concessions may be available however, such as a 50% discount for individual investors). There are complex rules surrounding the calculation of capital gains tax, and again we recommend that you speak to your own accountant on this issue.

For example, if you purchased an investment property in 2004 for $100,000 and sold it one year later for $110,000, you would have made a profit of $10,000 (simplified example, not taking into account other income and expense details). But, allowing for a 50% discount for individuals, you would only have to pay tax on half the total gain (ie $5,000). This is the amount on which your Capital Gains Tax would be calculated.

Buying and selling costs

The expenses incurred in buying and selling your investment property, such as the purchase cost of the property, conveyancing costs, advertising expenses, etc. cannot be claimed as a deduction against the rental income from the property.

However, such costs may be taken into account when you sell the property, to calculate any capital gain or loss on the sale.

Record keeping

You are required by law to keep all records relating to your investment property, both income and deductions, for a period of 5 years.

You must also keep records relating to the purchase and sale of the property for 5 years after the sale of the property. Although you do not have to forward these records to the Taxation Office with your Tax Return, you are required by law to keep them in case the Tax Office asks to see them.

Self Protection

Having acquired your investment property, the next important step is to ensure that it is adequately protected. Apart from insuring the building itself, investors in rental property should also consider whether contents cover is required. When planning to protect your investment there are two major considerations to take into account. First, is the type of insurance you need and second, the options you require.

Go to our Investor Insurance section to learn more.

Budgeting

Investment Loan Costs and Fees

There are a number of costs associated with residential property investment loans. It is important to know what they are so you can budget for them.

Establishment Fee

We charge a once only Establishment Fee when you apply for your loan. This fee goes towards the cost of assessing and processing your application.

Property Evaluation Fee

A valuation fee may apply on secured loans only. A fee for an independent valuation will be quoted upon application. This fee is non-refundable.

Lender's Mortgage Insurance

Loans with an LVR (Loan to Valuation Ratio) greater than 80% are charged the Lenders Mortgage Insurance. This insurance is a once only cost and can be incorporated into your loan.

Title Searches and other enquiries

A title search is required to verify the ownership of the property that you are buying or offering as security, and other enquiries may be required to ascertain whether any loans, rates or charges are outstanding.

We may require other searches which are usually arranged by our solicitor. We can advise details of these searches.

Stamp Duty and Mortgage Registration Costs

Stamp duty is payable by you to the Government on both the contract of sale and your mortgage. The amount varies according to the value of the property you are buying, and the amount and type of your loan. Your solicitor can advise you on the amount of stamp duty payable on a contract of sale.

Registration of your mortgage at the appropriate Lands Titles registry also involves a statutory fee.

Legal Fees

We strongly recommend you use a solicitor to act on your behalf. There is no legal fee charged for preparation of mortgage documents by Suncorp.

Landlord Tips

Increasingly people are becoming aware of long-term capital and income advantages from owning a residential income-earning property. But while owning a home or unit for rent can make good sense, it is important that landlords are fully aware of their rights and obligations.

It is always desirable for landlords and tenants to enter into a written agreement so there can be no misunderstanding as to what each other's rights and duties are.

For more information on tenancy agreements, please contact the relevant Residential Tenancy Authority in your State.

Final Planning

Investor's Checklist

• Analyse your budget
• Talk to Suncorp first
• Decide what type of investment property suits your needs
• Discuss the benefits of negative gearing with your accountant
• Save for your deposit
• Set aside money for your up-front costs
• Compare and evaluate the properties you are interested in before making a choice
• Decide whether to manage the property yourself or appoint an agent
• Contact your solicitor regarding the contract of sale
• Arrange your Suncorp loan

Other than the actual price of the property you want to buy, there are a number of other costs you need to plan for. Here's a list of additional costs that you may need to consider in your budget.

Stamp Duty

There are two types of Stamp Duty you will need to budget for when purchasing your property.

The first, Transfer Duty, is a state government tax which is payable when a property is transferred. It is calculated on the purchase price of the property and is paid by the buyer. This Stamp Duty name and amount varies between states and territories.

The second, Mortgage Duty, is payable on your mortgage and is calculated on your loan amount. From the 1st July 2008, Mortgage Duty charges have been abolished or altered in some states and territories. For more information, please refer to Office of State Revenue website.

Legal fees

You will also need to consider legal fees. When approaching a firm to do your conveyancing, it is important to understand how their fees are structured, and exactly what they cover.

Generally legal fees quoted will not include the searches that need to be done on a property before purchase. The basic searches can cost approximately $400-$500, and include:

• Contaminated Land Register Search
• Land Tax Search
• Title Search
• Council Rates Search
• Main Roads and Electricity Company Searches

Other searches may be required depending on the location of your property and the information you wish to know about the property. You should seek your own legal advice as to what searches are required and the costs of these searches.

Building and Pest Inspections

Many contracts on houses are signed subject to building and pest inspections. This gives you the opportunity to get the advice from a professional as to the condition of the property you're about to purchase. You should receive both a building and pest inspection report, outlining the current condition of the property, and any issues that you should be aware of. You should read this information carefully and question anything in the report you dont understand to ensure that you still feel comfortable purchasing the home.

Property Valuation

Property valuations give you an independent view on how much the property is actually worth. The bank may require a valuation to be performed on the property, before it can approve your home loan application, but any valuation conducted by the Bank is for Bank purposes only and often is not provided to you. If you're unsure whether the asking price for a property is valid, a property valuation may give you the additional piece of mind you need. Just remember that this may be another cost for you to budget for when purchasing a home.

Lenders Mortgage Insurance

If you borrow more than 80% of the purchase price, you will need to pay mortgage insurance. Mortgage insurance protects the Bank against default of the loan. It is based upon the amount you are going to borrow.

Please Note:  Not all of the above costs may apply to your situation however, they are costs that you should be aware may apply when purchasing a new property.