Property Investment Basics
Many of you will be aware that you can purchase a residential investment property, rent it out to another person and be a property investor. But, how does this actually work?
It is best to realise that there is a difference between buying a place to live and buying a place to rent out. The home purchase is an emotional one: you need a house that suits your lifestyle and plans.
Investing in property is a business
Much like any business, you need to have an understand of how your rental property operates, from what income it generates, what expenses it incurs, and the potential risks you may encounter. Below is a summary of basic residential investment property terms and concepts.
Property Investment Definitions:
Positive cash flow:
Means the rental income is covering all the costs of the property.
Is negative cash flow, the rental income does not cover the costs of the property. But you could be in a positive position once your tax refund is taken into account.
Examples of the costs of property:
- Interest on the loan*
- Property Management Fees
- Maybe some depreciation
*It is important to note that it is only the interest portion of the loan that is tax deductible, not any principal amount (or debt repayment) that you make.
There are 2 key sides to the financial numbers:
Your cash position:
Cash Income less Cash Expenses
Your tax position:
Total Income less Cash Expenses less non-cash expenses
An example of a non-cash expense item is Depreciation* which is a paper expense; This means it is recorded as an expense but you do not physically have to pay for it.
*Depreciation – this means the asset of the building and chattels can be written off over the life of the asset. This means it is expected that you will at some point in the future need to replace these items. As items life span is different there are different depreciation rates.