The 7 Most Common Property Investment Mistakes

The 7 Most Common Mistakes Investors Make When Investing in Property

The 7 Most Common Property Investment Mistakes

The 7 Most Common Mistakes Investors Make When Investing in Property

Investing in real estate can be a wise financial move. But to win at the property game and reap the maximum possible financial rewards from your venture, make sure you avoid these seven common mistakes.

Property prices in Australia have skyrocketed in the past 15 years, especially in the urban and suburban areas. In Melbourne, the median house sale price has passed the $1 million mark, climbing up by $300K in the last five years alone. Experts predict that real estate prices will continue to grow in the near future.

This real estate market trend drives many Australians to consider investing in property. Some acquire investment property with the view of selling it at some time down the road when property values are even higher. Others hope that rental property will become a stable source of passive income.

Finally, the solidity of a physical asset appeals to many during a time of global economic turmoil.

While real estate investing has tremendous potential, many Australians make property investment mistakes. For example, buying the wrong property or miscalculating repair and maintenance costs. House of Wealth’s team of property tax experts, based in Mulgrave, Melbourne have made a shortlist of the most seven common pitfalls new investors should avoid.

#1 - Not using the right ownership structure for your property investment objectives

If you take just one thing away from this piece, it would be to make sure you get your ownership structure right BEFORE you buy. Yet, a surprisingly large number of investors, including many experts, overlook this until it’s too late.

The ownership structure with which you choose to hold your property will impact how much tax you pay on rental income and land tax in years to come. It will also determine how much you pay in administrative fees.

Sadly, many investors manage to get everything else right in their property transactions, only to surrender substantial portions of profits in avoidable taxes or expenses.

The most common investment structures in Australia are:
• Individual
• Partnership
• Company
• Trust
• Self Managed Super Fund (SMSF)

Choosing the best ownership structure for your particular investment purposes is a complex subject, and several books have been written about it. There’s no single right answer that applies to everyone. It will depend on your personal circumstances and objectives.

Suffice it to say that you should seek expert advice from a tax professional who’s experienced in property investment matters before you buy.

If it turns out you should be using a Self Managed Super Fund and/or a trust, you will need to make sure you have the necessary arrangements in place before you buy.

#2 - Not doing research on your investment property and its area

The location of your investment property will have a huge impact on the profit you can expect to make. For instance, it would be hard to get quality tenants in a run-down neighbourhood that lacks easy access to transit, shops, and schools.

To make sure that you buy the right place, get to know the area well. Drive and walk around, speak to real estate agents, and seek out genuine input from locals who have lived there for some time. Ask yourself:
• What sort of people would like to live here? What kind of tenant or buyer do I hope to attract?
• What are the selling points of the neighbourhood? Is it quiet and pleasant? Does it have a good reputation?
• Does the area have quality schools, parks, commercial centres, and other attractions?

Be especially wary of areas with plunging prices and falling demand. A neighbourhood with rock-bottom prices usually isn't the best location for investing in property. You might buy a place cheaply, but you'd end up with a low property value.

#3 - Buying a property without any financing set up in advance

Property investors who have a large deposit saved up in advance will have a wider choice of investment properties—plus lower mortgage interest rates—than will someone borrowing money.

If your property deposit equals less than 20% of the asset price, mortgage brokers will probably offer you a plan that includes the lender's mortgage insurance. This insurance is a non-refundable fee that protects the lender when people who borrow money default on a loan.

#4 - Not getting enough information about the property before buying it

When you invest in property, you want to learn as much as you can about it, especially with major issues that could cost you a lot of money down the road. A dishonest property owner can try to hide structural issues, plumbing problems, or mould by doing a cosmetic overhaul before putting their building on the market.

A property investor should keep their eyes open and ask the right questions, such as:
• How old is the house, commercial space, or apartment?
• How old are the roof, septic system, plumbing, and HVAC systems?
• What repairs has the building had in the last five years?

Obtaining a professional building inspection report is very wise before buying a property. Many people include a home inspection contingency in the contract when they make an offer.

We also recommend hiring a certified property valuer before you sign a deal. A valuer will give you a realistic estimate of how much the house or building is worth.

#5 - Failing to look at all aspects of the property before making an offer, including zoning and restrictions

Make sure you research all financial aspects of your real estate investment. For example, you may buy a house hoping to earn rental income from a unit you plan to add, only to find out later that local zoning laws restrict any add-on building.

Answers to the following questions will impact your future capital gain:
• Will you need to pay capital gains tax? Can you expect any tax deductions?
• Have you budgeted for entry and exit costs, legal fees, and stamp duty? What about projected advertising costs if you decide to sell one property and buy another in the future?
• Have you figured out exactly what you would pay in property expenses, land taxes, and landlord insurance? Are any of these expenses tax deductible?

Also, keep in mind that property management fees will eat away part of your rental income if you need to hire a property management company. Research before you buy about how much local property managers charge.

#6 - Neglecting to take into account future changes, such as new developments or road expansions that could impact your purchase

Imagine purchasing an investment property with a gorgeous open view on the edge of a quiet neighbourhood. Then, a year later, property developers erect a row of high-rise buildings that block most of the light and airflow to nearby houses, including yours.

To avoid such an aggravating scenario, do your best to research any present and future building projects around your investment property.

#7 - Making decisions on property investing based solely on emotions rather than logic and reason

During a first realty investment, it's easy to let your emotions, likes, and dislikes sway you. To keep a cool head when investing in real estate, remind yourself that you aren't choosing a home for yourself and your family.

Your investment should offset costs and add to your capital growth, along with your other investments like stock market shares.

Avoid These Mistakes. Consult the Melbourne Property Tax Accounting Experts at House of Wealth

At House of Wealth, our Australian property tax experts and financial planners can help you benefit from a property portfolio as part of an investment strategy to lead you to financial freedom. We offer personal financial advice based on your investment goals and cash flow. Contact us to learn about maximising wealth while minimising related taxes.

Are you ready to achieve your financial goals? Please call us on +61 (0)3 9999 7703 in Mulgrave, Melbourne, to book your free 30-minute consult now.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Unlet Property Rental Tax Issues

Holiday Rental Owners: Beware This Unlet Property Tax Trap

Do you own a rental property that stands vacant for any period of time? Or does your investment property double as a personal holiday home?

Yes? Then this article is for you.

The ATO has warned that claims for deductions relating to rental properties for the Y.E. 2017 will be subject to close scrutiny.Read more


If you link Bank A savings account to Bank A investment loan account as an offset account, does the deposit and withdrawal activity in the offset account impact deductibility of interest charged to the investment loan account?

No it doesn't affect the interest deductibility.

This remains the case where you have a savings account linked to your loan account as an offset account.

The savings account and loan account, while linked, are separate accounts.

While deposits and withdrawals in the offset account will increase or decrease the amount of interest charged to the investment loan account, the deposits are not repayments of the loan and the withdrawals are not new borrowings.

The use of the borrowed funds is not affected by the deposit and withdrawal activity in the offset account.


You can claim borrowing expenses greater than $100 over a five year period or over the life of the loan whichever is the least. You can claim all of the following borrowing costs

• stamp duty charged on mortgage (note this is not the stamp duty on purchase of the property)
• loan establishment fees
• title search fees charged by the lender
• costs for preparing and filing the mortgage documents
• mortgage broker fees
• valuation fees for loan approval
• lender’s mortgage insurance

It is important in the first year that you don’t claim the full amount amortised over the five year period but you will need to apportion the first years borrowing costs over the number of days between the date you took out the loan and the end of that particular financial year. Another common mistake is either not claiming the borrowing costs at all or claiming them all in the first year the loan is taken out.

If a loan has been taken out and has a mix of private and investment/business components (something we recommend you really try to avoid and work together with your accountant and mortgage broker to prevent getting into this sticky situation) then the borrowing expenses also need apportioned.

Can you claim a deduction for 100% of interest incurred on an investment loan held in joint names where the title of the investment property is in your name only?

Yes you can.

Taxation Ruling TR 93/32 considers the division of net income or loss between co-owners of a rental property. TR 93/32 states that net income or loss from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title. Legal interest is determined by the legal title to a property.

TR 93/32 states that where the title deed of a rental property indicates sole ownership of the property, and the mortgage is held in joint names, the legal owner can claim the full amount of the interest paid.

In example 5 of the ruling it states:

The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.


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