Owning an Investment Property

The Australian Taxation Office or (ATO) allows the property investors to claim a deduction related to the building plant and equipment items contained within it. It can be claimed by any owner of an income producing property. This deduction essentially reduces the after tax cost of owning an investment property which means investors pay less tax using your investment property calculator Melbourne.

The Lenders' Criteria

Lenders uses different qualification criteria to determine if a mortgage is warranted and how much they'll loan against a property. Investor owners usually aren't individually evaluated as to their credit history because it's not as important to the lender as the income generating potential of the property to be mortgaged.

The Rental Income

When the motivation for the purchase is income, the lender wants to evaluate the property based mostly on the income it will generate. Of course, property condition and other factors enter into mortgage qualification as well, but income is the biggest factor. A mortgage is likely to be initiated if the property can service the debt and meet the mortgage payments and still have an acceptable monthly income cash flow. 

The Expenses Factor

Marketing and advertising expenses can vary a great deal depending on the property type. Most of this expense for an apartment property would be advertising to generate tenant applicants. The same would apply to a retail or office property, but there might also be marketing expenses to present the property to consumers or clients for the tenants. Professional management is the norm for larger commercial properties, and this expense can be significant. It can be offset somewhat, by the savings that professional management can generate in the operation and maintenance of the property. Utilities should be included when they're not passed along to tenants. Everything from landscaping to fixing broken air conditioning units or painting of units should be included in repairs and maintenance. Do not forget the insurance which is a major expense as well. Other expenses can depend on the use of the property and the tenants. Missing expenses will increase net operating income and your client will overpay for the property based on valuation using cap rate. It's critical to capture all the operating expenses of the property. 

There are other costs you'll have to pay in which using the investment property calculator, but are not necessarily limited to:

·         Property taxes

·         Insurance

·         Maintenance

·         HOA dues

·         Management expenses, if you plan to hire a property manager

·         Utilities

Calculating Property Depreciation Using an Example:

Apply the investment property calculator using a $300,000 single-family home purchase.

1. Separate your land and building values, which you can also get from a tax assessment. Here, land value is $100,000 and building value is $200,000.
2. Divide your building value by 27.5, which is the number of years IRS has prescribed as the useful life of a residential property. This is your annual depreciation of your residential investment property.
3. Multiply this annual depreciation by your marginal tax rate.

Property depreciation is a critical tax deduction for real estate investors and should not be overlooked. It is important for the real estate investor to understand the basics of depreciation. This will assist the investor with tax planning and help them understand after-tax investment returns.