There's a theory that if your accountant feels comfortable with the idea of you buying an investment property, and if everything else has fallen into place, then you should feel somewhat relaxed. Yet, for some of us, consulting an accountant is not the top of a to-do list in the lead up to a property purchase.
Owning an investment property is like owning a business, yet some people treat it as a hobby. Real estate expert George Astudillo told The Huffington Post Australia it's important to have a realistic budget and a business plan.
"Your plan needs to allow for movement on interest rates and the rental market. It's amazing how many buyers haven't a clue on what the real costs of buying are. Not understanding the real costs can lead to financial pressure and stress and this can lead to poor decisions and outcomes," Astudillo said.
"Buying an investment property is an exciting experience. But, before you set out to become a landlord, you should consider asking your accountant for their valuable expertise."
Greg Hayes from Hayes Knight Accountants and Business Advisors told HuffPost Australia it's important for people to understand the tax outcomes of purchasing a property, as well as having an understanding of the cash flow outcomes: two separate issues.
"Sometimes people get carried away with what's perceived to be the tax outcome. But the tax outcome is quite different from the cash flow outcome. They should be asking their accountant what they should be doing to maximise the tax outcome. Also the issue of who is going to buy the property: one person, a couple or an entity," Hayes said.
"Ask your accountant to work through a budget with you in terms of what it will look like post-purchase, making sure you've allowed for all the costs, making sure you've allowed for the debt, understanding whether you should be borrowing on an interest-only basis and what the cash flow impact of that is. That's where an accountant can show you things that maybe you haven't considered."
Astudillo said while there are a number of ways to own a property, each has different tax implications.
"Whether you buy it in your own name, a company name, as part of your superannuation or in a family trust will depend on your current financial situation," Astudillo said.
How much should you borrow? Negative gearing is currently a hot political topic, find out what the fuss is about and how it can work for you. Are the tax advantages from negative gearing appropriate for your income level or should you play it safe?
Are you better off buying a brand new property with high depreciation allowances or an older property that you can renovate? The renovation costs may be depreciated over a set period of time. Understand the value of a depreciation schedule and how it makes negative gearing tax positive.
Be clear on the difference between repairs and renovations. Any repairs or renovations straight after settlement are considered capital works. Make sure you understand the difference between capital works and expenses.
Get some help from your accountant to devise a simple budget and plan. There are many items in a property that will need to be continuously replaced. Carpeting and painting can be expensive and will need to be replaced every five-ten years. Don't let your property look run down because you haven't allowed for the costs.