As property prices and rental rates rise across Australia, investors are holding onto their properties to take advantage of positive rental returns and strong capital growth.
But this raises the question – how much money can you make from property investment? The upfront costs of purchasing a property and the ongoing costs can go into the tens of thousands, the important thing is keeping track how much you really make each year.
In this article, we will cover:
- How you make money from property investment
- Factors that impact how much you can make
- The bottom line
Firstly, how do you create wealth from property investment?
Investment property owners can create a return from rental income and capital growth.
Your rental income is the rent a tenant pays to live in your investment property. If the rental income is more than the expenses, the property is positively geared and is surplus to any ordinary income you may earn elsewhere.
Improving the property will enhance the amount of rental income you will make now and over time. For example, doing some basic landscaping and a paint freshen-up could achieve an extra $25 per week or $1,300 per annum.
Capital growth is the increase in the property’s value. It is usually the result of strong demand for the property you hold. Historically in Australia, all areas grow in value over the long term.
A capital gain is made when a property is sold for more than its purchase cost. For example, if an investor purchased a house for $500,000 in a postcode that experienced 30 per cent growth over the 5 years that they owned the property, it’d be worth $650,000.
How claiming expenses creates wealth
Claiming tax deductible expenses means you will pay less tax on your income, so you have more money back in your pocket. Tax deductible investment property expenses include:
- Property management fees
- Repairs and maintenance
- Body corporate fees and strata charges
- Property taxes
- Council rates
- Property management fees
- Advertising fees
- Some legal expenses
- Property depreciation.
So, how much can you make from property investment?
Unfortunately, it’s not a straightforward answer. Many contributing factors impact how much you can make from property investment. Just some are:
- Property type and location
The type of property you own and where it’s located will influence rental yield and the capital growth.
A unit and a house in the same location are unlikely to attract the same rental rate. And you wouldn’t expect to charge the same amount of rent for a 3-bedroom house in metropolitan areas as you would in a regional town.
Property prices don’t increase at the same rate across the country. Some areas could be booming, while others are decreasing. The capital growth (or even loss) outcome can change quite significantly based on the location and property type.
- The market
Rental rates, competition and vacancy rates in a local market can drive the return from your investment property up or down. So, it literally pays to do your research before buying.
Look at other, similar properties in the same area – what are their rental rates and how much are they selling for? Does history show rising or falling property prices? Factors such as these will inform how much money you will make from an investment property purchase.
- Utilising hidden tax deductions
As a property investor, you have access to more tax deductions. We covered many of these earlier, but it’s important to use all tax deductions at your disposal – even ones that are hard to find, such as depreciation.
Depreciation is the natural wear and tear of a property and its assets over time. The bonus to this deduction is that you don’t need to spend any money to claim it. It’s one of the highest deductions available to investors, coming second only to costly interest repayments.
You can claim depreciation on the structure of the building like the walls, doors, roof and stairs. Depreciation is also available on any eligible assets like hot water systems, light fixtures, kitchen appliances and window coverings. This lucrative deduction proves well worthwhile, with the average first full year deductions found by BMT coming to almost $9,000.
The bottom line – do your research and crunch some numbers beforehand
So, what does this all mean? Essentially, you need to do the research and leg work to know how much money you will make from property investment. Doing so will give you an idea of the rental return you will make and the capital growth potential of the property.
Your cash flow isn’t going to be the same as the next investor, so you need to thoroughly understand the role the investment will play in your cash flow.
BMT Tax Depreciation offer many free tools and apps to help you do the research and get to the answer. PropCalc is a great example, as this shows the real cost of owning a property and the impact it will have on your cash flow (positive or negative). The research and insights feature on MyBMT can also be a helpful tool when doing the background research on a property and area.
To learn more, contact the team on 1300 728 726 or Request a Quote.