Entrepreneurs are well known for pouring their hard-earned dollars back into their businesses, but this isn’t a zero-sum game and setting some aside for the Australian property market can benefit your business also.
A property portfolio can provide extra cash flow, reduce your tax liability and be borrowed against if times call for it.
Tony Morgan, a regional manager with NAB, manages relationships with all kinds of entrepreneurs. He says: “The majority of our clients who I see that are successful, they create wealth and make money out of property investment outside their core trading business.”
Here we look at five things business owners might consider when making a decision to borrow and invest in the property market.
Know your objectives
There are different properties for investors with different needs.
Morgan asks: “Are you looking for future capital growth, or are you looking at an additional income stream? It is common with property to get one or the other, but it’s challenging to get both.”
Those whose cash flow is a little tight may look for a cash-generating property with a higher rental yield, such as an inner-city apartment.
But if cash flow isn’t an issue you could shoot for the bigger prize of capital growth by selecting a property with a greater land component. Well-chosen houses typically cost more than apartments and generate a lower rental yield, but they show better long-term capital growth, Morgan says.
Consider your time
Most business owners are pressed for time. While those with a passion for renovation in their spare time might try to raise their capital growth upside by purchasing a ‘fixer-upper’, most will want something less involved.
A thorough inspection from a professional can highlight maintenance issues you might not have considered. You will want to know if the house is old and needs rewiring or has things like early-stage rot in the floorboards.
If you plan to live in the house, is it a long commute from where you will work? Does it have a high maintenance garden that may whittle away at your leisure time?
If you plan on renting it out, a good property manager can act as your rent collector, bookkeeper and property inspector rolled into one.
Enjoy the full benefits
If you are living in the property as an owner occupier, you will enjoy an exemption from capital gains tax when you sell – and may find it easier to get a mortgage. You might even be able to access the First Home Owner Grant.
But chances are as a business owner, investment properties will offer a greater tax advantage. You may be able to secure an interest-only loan could make the property easier to hold long term, and claim a range of deductible expenses on investment properties like interest, maintenance and rates.
Negative gearing is particularly beneficial for reducing tax liability. Make sure you get the full benefits of depreciation, Morgan says, as it is a way to maximise the advantage of negative gearing.
“Depreciation is an item you expend off the rental income, but it’s not an expense where you have actually handed money out,” Morgan says.
Time it right
Dips or shocks to property valuation do happen and, while good property historically bounces back, you only get the benefit if you can continue to hold the asset long term.
Morgan says a degree of boldness is necessary for successful property investors, but they should also be comfortable in the sustainability of their income.
“The people I have seen be successful in property are cognisant of affordability, and not just housing affordability but whether their cash flow is able to sustain their investment.”
Timing the market well can bring forward the day when you start to enjoy a large equity cushion, which brings freedom and flexibility, he says, adding that owners of businesses in counter-cyclical industries such as health, education and insurance could find themselves in the enviable position of being able to buy prime property during downturns when prices are lower.
Do your research
There are so many resources available today for property research that can put you in a better position to negotiate with the seller or agent. Online services can tell you a property’s sales history and give you a list of similar properties in the area and what they sold for.
Is the median price in the suburb you are considering rising, flat lining or falling? How has it historically weathered downturns such as the financial crisis? Is the number of homes for sale in the area rising or falling?
Look at tenant demand if you plan to rent it out. If the market in a certain locality has an excessive supply of residential units, for example, the property could be harder to fill.
And be across your potential running costs, Morgan says. “Make sure you are aware of council rates, body corporate fees, management and letting fees.”
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