1. What is a Residential Investment Property?

A residential investment property is a house, townhouse,terrace or unit, which the owner does not use as a personal residence, but rents out. This allows the investor to benefit from both tax advantages and rental income from the property. If you have a residential home loan the cash flow from the Investment property can be used to accelerate the mortgage pay out on your residential home.

2. What is a negative geared property?

The term "negative gear" simply refers to a situation where your cash outflow to maintain an investment exceeds your cash income from the investment itself.
For example,with a residential property, if the mortgage payment on your property exceeds the rental income from the property, it is said to be negatively geared.In other words, the investment income is negative, which allows you to claim the interest costs on your mortgage or loan as a complete tax deduction.

3. What if I don't feel comfortable about going into debt?

While the concept of debt may seem disturbing, the reality is we live with debt of one form or another and few people attain true financial independence without some form of leveraging. In fact most Australians are actually more comfortable with debt than they realise, through the mortgage on their own home, or perhaps the loan on their motor vehicle. Many of us are 'in debt' to the taxman by virtue of the fact that we earn an income.There are two key principles that ensure security when it comes to borrowing.·

• ONLY BORROW TO PURCHASE APPRECIATING ASSETS
• MAKE SURE YOUR DEBT IS MANAGEABLE

4. What happens if my income stops and I can't service my debt?

The answer to this question can be demonstrated by looking at the financial circumstances of the average Australian family. With interest rates the lowest they have been in 30 years, many families are focused on paying off their home as quickly as possible.
For example: A couple may be trying to reduce their loan by paying an extra sixty dollars each week. If one partner gets sick, or looses their job, they may be placed in the position where there is no redeemable assets base to turn to but their own home. If that same sixty dollars a week were invested in a second house, the risk may actually be diminished. The advantage of investing in a redeemable asset base is, if something happens, the family house is not put on the line, and there is something else to turn to. Life or trauma insurance and income protection policy will replace 75% of a person's regular income while that person is unable to work.

5. What if I need the money in a hurry?

Residential property offers a lot of flexibility. Today, if you need cash in a hurry you can actually draw the equity off your own home simply by re financing. If, in a worse case scenario, an income stream is cut off for an extended period of time and there is no redeemable asset base to turn to, the investment property can be sold to pay back the loan.

6. What happens if interest rates rise?

If this is a concern, take out a long term or fixed interest loan. This gives the investor two advantages:

• The amount of the repayment is known in advance, it is easy to plan financially.
• The amount of interest paid will remain constant for the duration of the fixed term, despite a rise in interest rates.

Remember, whenever interest rates rise, property prices also rise, providing the capital growth. We only have to look back in 1998 to see an example of the parallel between a rise in interest rates and a peak in property prices.

7. What happens if I can't find a Tenant?

It has been our experience that, provided a building is in a reasonable state of repair, and you are not a greedy landlord, you can find a tenant for it. This is particularly true of the lower end of the rental market. If there is a protracted vacancy rate (for example, anything more than two weeks) it may be a matter of adjusting the rent slightly. With the right property management in place, however, vacancy should not be a problem. A good manager - in the form either onset manager or local real estate agent- should have no difficulty finding suitable tenants, with whom they can foster a long term relationship.

8. What happens if a property is damaged or if I have a bad tenant?

A comprehensive insurance policy will protect your property against most forms of damage. The cost of the insurance is minimal and is tax deductable. If you are correctly insured an instance such as a natural disaster can actually work in your favour, by creating a significant tax advantage.With effective property management, tenant difficulties should be non- existent or reduced to a minimum.

9. What if I don't have time to manage my own investments?

Maintaining control of your investment does not mean active involvement.Once property has been purchased, an investor's involvement can be reduced to a minimum through the use of an effective Property Manager. As mentioned in the previous question, the right kind of property management will save the investor time, money and tenancy headaches. Managers may assist in some or all of the following areas: maintenance, improvements, tenant screening, rent collection, leases preparation, advertising, inspections and tenant relationships. When selecting a professional manager, it is important to look for someone who is, not only a good people manager, but also someone who runs the rental roll like he would run his business.

10. What if I don't have money for a deposit?

Cash is not necessary as a deposit when there are sufficient assets to borrow against. For example, the equity in an existing home can be used to finance the purchase of an investment property and its associated cost.

11. We want to sell our home, what do we need to do?

For your property to be listed for sale either privately or with an agent, it is law that you must have a draft Contract prepared. This document contains a full title search confirming that you own the property, a zoning certificate from the council and if applicable a copy of a drainage diagram showing the connection of sewer mains to your property. This document needs to be prepared by your Conveyancer or Solicitor in anticipation of the property being sold

12. We have found a property to purchase. What should we do?

The immediate steps to be taken or matters to be considered are:

• Instruct a Conveyancer or Solicitor
• Ensure that you have a written loan approval for this property
• Arrange pre-purchase inspections e.g.. Building, Pest, Survey, Strata Report (as required)
• Ensure that you have the deposit available or arrange Deposit Power Bond

13. As the vendor, we have been asked to accept a 5% deposit on exchange. What is your advice?

Normally the deposit is 10% of the price and is held by the stakeholder (usually your agent) pending completion of the sale. The deposit represents your security that the purchaser will complete the transaction. If the purchaser fails to complete he runs the risk that the deposit will be forfeited to you. If you are asked to accept a reduced deposit we would recommend that you seek the advice of your legal representative before making a decision about this.

14. If I have agreed to purchase a property and paid a holding deposit on it, can I be gazumped?

The answer is YES. Unfortunately until such time as contracts are exchanged, there is no binding agreement and either the vendor or the purchaser can withdraw from the deal. The holding deposit is normally refundable to the purchaser, regardless of who decides not to proceed. This is why (particularly from the purchasers point of view) an immediate exchange with a cooling off period can be an advantage.

15. My agent has asked that I sign a contract and exchange with a cooling off period. What does this mean?

Agents have the authority to effect an exchange of contracts on behalf of the parties to the transaction for the sale of residential property. This means that a legally binding contract is immediately entered into. The benefit of a cooling off period only applies to residential property which includes rural residential holdings up to 2.5 Ha.

Purchasers have the benefit of a 5 business day cooling off period. During this time you would normally ensure that you have a firm loan approval for the purchase and carry out such searches and inquiries (building and pest reports) as are considered necessary. Whilst the purchaser has the right to cancel (rescind) the contract prior to the expiration of the cooling off period, part of the deposit (.25% of the price) is forfeited to the vendor. On a $400,000 transaction this would be $1,000.00.

If you are the vendor you have the advantage of knowing that a sale has been effected (but subject to the purchasers right to cancel the contract during the cooling off period). However you do need to be aware that, normally, completion of the sale will take place within 35 or 42 days after the contract has been signed. This may not leave you much time if you have to find another property to purchase and coordinate the completion of both transactions so that you can move from one home to the other.

16. The property I am interested in is being sold by auction. What do I need to Know?

If you successfully bid for a property at auction, you are immediately committed to a contract for the purchase of that property. The cooling off period referred to above does not apply to properties purchased at auction or contracts entered into following post auction negotions if the contract is exchanged on the same day as the auction. Obviously you need to have a pre-approval for a loan, if required, to assist you with the purchase and also need to carry out your quality inspections( pest and building etc.) prior to the auction date.

You also need to have a budget or upper limit on the price you are prepared to pay and stick to it. It is easy to get carried away in the emotion of the environment.