Walker Hill Group

Things to consider when turning your home into an investment property

Converting your personal home into an investment property is an exciting step – and can be very lucrative. However, there are a number of things you’ll need to be aware of when making the transition

Below are five important things to consider when turning your home into an investment property. 

Consider how it will affect your taxes

One of the perks of having an investment property is the associated tax deductions. Rent is considered income, so it’s taxed accordingly. This means that when tax time comes, it’s possible to claim deductions on this income. 

Investment homeowners can claim things like land tax, building depreciation, appliance depreciation, repairs and maintenance. 

However, while this may seem ideal – there is one big glaring rule that may affect this significantly. If you bought the house, and used it as a personal home for a period of time, this couldn’t affect how much you can claim. You can only claim for how much your house was worth when you turned it into an investment property.

For example, if you bought an $800,000 house and occupied it for ten years, paying off $400,000 of the mortgage, the remaining $400,000 you still owe becomes your tax deductible debt.

Get a valuation done

If you’re turning your residence into an investment property, you’re going to want to know the value of it for two main purposes: for tax reasons, and to work out a suitable rental rate. It can also be very helpful if you’re looking to refinance your mortgage.

A good rule of thumb is to rent your house out for 0.8% to 1.1% of the total value of the house. You can also look online to do some market research on what similar houses in a similar area are renting for.

In order to find out what the value of your house is, you can get a valuation done.  Valuations are conducted by an appraiser. They will visit your house for a few hours and study the interior and exterior, as well as take some notes and measurements. An appraiser will then pair this information with current home sales data of the area, and come back to you with a figure that they think your property is worth.

Talk to your broker about moving payments from principal & interest to interest only

Interest only mortgages are fairly self explanatory, it means that the borrower will only pay interest for a certain period of time. This can be helpful when a homeowner is converting this residence into a rental. 

If the house needs any modification to get it rent-ready, there can be a number of costs involved. And, of course, the house will be tenant-free while it’s been transitioned into a rental property. So, an interest only montage will allow for more liquidity that can be spent on costs to set up the rental.

Once the house is ready to go and rented with a responsible tenant, the owner can switch back to a principal and interest mortgage. Depending on your current mortgage arrangements, your broker may be able to switch you over to an interest only loan.

Use the six year rule in your favour

The six year rule means that a former home can be turned into an investment property for up to six years. As long as the house isn’t used as an investment property for more than six years, then the owner won’t have to pay capital gains tax when they sell it. 

This saves the homeowner a significant amount of money!  Capital gains tax is the difference between what the owner paid for the property, and what they sold it for. This amount needs to be declared on a tax return and can push taxpayers into high brackets.

Get landlord insurance

An investment property is a form of income, which means that the owner can be liable if any damages occur. To ensure that you and your family are protected, you should take out landlord insurance.

There are different levels of landlord insurance – some just cover the basics, like structural damage and natural disasters. Whereas, more premium landlord insurance policies will ensure that all fees are covered, should you get sued by a tenant and taken to court. It’s very important to do your research on landlord insurance and ensure that you’re appropriately covered. 

If you would like to find out more about making the transition from a principal loan to an investment loan, reach out to our finance team at finance@walkerhill.com.au, or give us a call on 1300 865 167.

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