investment property

investment property

When talking about owning an investment property, some folks might feel as if this kind of financial goal is too far out of their reach…they just seem too expensive. This is especially the case since rising interest rates started putting added financial pressure on many Australian homeowners. Throw in the rising cost of living and escalating inflation, and getting finance for an investment property loan might seem like a total pipe dream.

However, with the right approach and a clear understanding of the current economic landscape, buying a property for investment is possible…without breaking the bank!

In fact, what if we were to tell you that it could cost you less than $20,000 per year to invest in a $700,000 property in Queensland?

Does that sound too good to be true? We promise you, it’s not! Let’s explore how you can secure a property for investment in Queensland for a surprisingly affordable amount.

Just a little caveat before you proceed: this may not be applicable to everyone. So please chat with us if you are interested and we can help assess your specific circumstances.

Has the Australian Investment Property Market Changed?

With so much news speculating about interest rate rises and mortgage pain, we know you might be feeling uneasy at the moment. But it’s also important to remember that the Australian property market has historically moved in cycles – essentially, what goes down will always come back up again. This is one of the reasons why we know property funding in the current economic climate is not necessarily out of reach.

According to a report published by Westpac in 2019, Australian property has seen an average growth rate of 6.3% over the last 150+ years. So, for a property valued at $700,000, investors can potentially anticipate appreciation of $44,100 in the first year alone (based on the historical average). However, in recent years, this appreciation has escalated, with the median house price on the Gold Coast increasing by 21.2% per cent over the 3 years leading up to January 2024. If property prices continue to climb at the same rate, that would deliver a potential increase in value of $148,400 over just 3 years.

What are the Costs of Buying an Investment Property?

When it comes to buying a property for investment, it’s important to consider both the initial purchase costs and the ongoing costs involved in owning the property. Initial purchase costs typically include:

  • Stamp duty
  • Title search fee
  • Mortgage registration fee
  • Building and pest inspections

Stamp duty in Queensland is based on the purchase price of the property, as well as whether you’re a first home buyer, an owner-occupier or an investor. An estimate of stamp duty costs can be determined using an online calculator. For an investor buying a $700,000 property in Queensland, the estimated stamp duty payable would be $24,525.00.

Let’s just say that on average, initial purchase costs are equal to around 5% of the entire property value. For a $700,000 property, this means $35,000 in initial purchase costs. As you can see, this figure is largely determined by the stamp duty cost. However, these initial purchase costs can go higher depending on which state your property is located in.

For instance, a property located in South Australia with the same purchase price will have stamp duty costs of around $32,330. And that’s just your starting cost – you’ll still need to add in the title search fee, mortgage registration fee and the cost of pre-purchase building and pest inspections (which can range in cost between $300 to $1,100).

What are the Ongoing Costs of Owning an Investment Property?

What about the ongoing costs of owning and maintaining a property for investment? These may include:

  • Building insurance
  • Landlord insurance
  • Property management fees
  • Council rates
  • Strata or Body Corporate fees
  • Repair costs
  • Ongoing maintenance costs
  • Utility costs

A modest estimate of these costs would be 1% of the total purchase price. For a property valued at $700,000, this would be about $7,000 in ongoing annual costs.

How Will Investment Property Mortgage Rates Impact Repayments?

Securing competitive investment property mortgage rates will help to reduce the ongoing cost of owning your investment. As of May 2024, the average mortgage rate on a 5-year fixed-rate mortgage is 6.54%. According to our home loan repayment calculator, this means that for a property valued at $700,000, your annual mortgage costs will amount to $53,316 for the next five years.

This calculation is based on home loan solutions where the investor pays principal and interest repayments to reduce debt over time. And given the Reserve Bank of Australia hasn’t ruled out further interest rate rises over the coming months, we can’t rule out the possibility that interest rates will continue to go up as the year progresses. We are watching the RBA decisions closely to give our customers the very latest and best advice on home finance.

Note: Borrowing the full property purchase price means you may have to use equity from another property or secure a guarantor loan. If you are able to get funding for an investment property loan with a cash deposit, then your loan and mortgage repayments will be smaller.

How to Make Money on an Investment Property in Queensland

Now, here is where we explain the benefits of owning a property for investment and the legal tax trick you can use to reduce costs.

Investing in property often requires taking on a sizable investment property loan with a long-term mortgage commitment. However, there can also be huge financial benefits that come with owning a property for investment purposes. On top of your asset growing in value over time, you can also earn passive income through rent.

For example, rental properties on the Gold Coast had an average rental yield of 4.98% during 2023. For a property worth $700,000, this works out to be $34,860 in rental income generated per year.

Understanding Tax Deductible Property Costs

If you’re incurring expenses on your investment property that are higher than your income, you can leverage your marginal tax rate and claim this amount as a tax deduction.

For the 2023-2024 tax year, the marginal tax rate for Australians earning between $45,001 – $120,000 will be 32.5%. This means that you can claim 32.5 cents tax payable for every dollar your investment property costs you (please note that this amount does not include Medicare levy or the impact of tax offsets such as LITO or LMITO).

What this basically tells us is that you will get at least a third back of whatever you pay, which will definitely help reduce the after-tax cost of managing your property. You can also get a bigger tax return if your income is higher than the specified income threshold.

Sample Costs of an Investment Property in Queensland

Okay, now that we’ve sorted out the average costs and potential tax deductions, it’s time to crunch some numbers.

Purchase Costs: $735,000

  • Property value: $700,000
  • Upfront purchase costs at 5%: $35,000

Ongoing Income: $34,860

  • Gross rental yield: At 4.98% per annum

Ongoing Costs: -$60,316

  • Ongoing property expenses at 1%: -$7,000
  • Total mortgage payments: -$53,316 ($45,780 in interest)

Cashflow Cost/Net Income: -$25,456

  • Cashflow cost/net income: Total costs – ongoing income

Tax Refund: $5,824

  • Tax refund: Loan interest + annual expenses x 32.5%

Average Annual Property Growth Rate: $44,100 per annum

  • Average annual growth: 6.3% historical average

Net Annual Costs After Tax: $19,632
Net Annual Benefit: $24,478

A Summary of Sample Costs

Feeling confused? Ok, let’s break it down into something a bit simpler:

If you own a $700,000 property on the Gold Coast, the investment will generate approximately $34,860 in rental income each year. However, ongoing expenses would total around $60,316 annually. This leads to a net cash outflow of $25,456 per year. However, you can expect a tax refund of $5,824 due to negative gearing. As a result, the overall net cost of owning the property amounts to $19,632 per year. And if you factor in property appreciation (6.3% long-term average), your investment is actually growing by about $24,478 per year.

One last caveat: these figures are based on a number of assumptions, and interest rates are ever-changing. That said, there is a potential for substantial annual benefits from this hypothetical Queensland property.

If this has piqued your interest in property ownership, talk to your local lending brokers to get funding for property development.

Talk to a Broker About an Investment Property Loan

The Reserve Bank of Australia hasn’t ruled out raising the official cash rate again, which in turn would increase the interest rates all across the country. There is a lot of uncertainty in the economy at the moment, and talking to credible finance brokers will definitely help you gain clarity around your financial circumstances and what you can afford when it comes to buying an investment.

Our highly experienced Gold Coast mortgage brokers would be more than happy to sit down with you to discuss your investment goals. We’ll happily answer questions, work out the maths and help you evaluate your best loan options for securing an investment property.

If you’re interested in obtaining an investment loan, but you’re not quite sure where to begin, start by booking a free consultation with one of our experienced investment brokers.