Buying an Investment Property in Australia

Before you buy

Buying an investment property can be an expensive and complex purchase - do your research carefully.
Property can be a complex form of investment.
Property is a physical structure which people live and work in, and which requires maintenance and running costs, and involves more financial commitment and supervision than other 'passive' forms of investment.
Investment properties also compete in the marketplace with other forms of investment like shares, can be more exposed to economic highs and lows, and more difficult to sell quickly.
Before you decide which type of property investment is right for you, prioritise your needs.
This should be done in consultation with your accountant, financial adviser and solicitor.

For more information, read this document on Real Estate and Taxation

There are a range of property investment options:

Property offering a high rate of return and a positive cash flow (more commonly commercial rather than residential investments).
Property offering a lower rate of return (often a loss) but providing positive tax incentives to be offset against other forms of income (this is called Negative Gearing).
Managed investment, controlled by a third party, offering a guaranteed rate of return for a contractual period of time (most commonly Hotel/Serviced apartments).

The type of investment property most suitable for you will depend on your personal financial situation.
If you are on a high income and expect to be working for many years yet, your advisor may advise you to invest in a property that will perform at a loss whilst providing tax relief and long-term capital gain.
If you are on a fixed income and no longer work, your advisor may advise you to purchase an investment property that can provide a positive cash flow and provide you with regular income.
Your accountant or financial adviser will help you determine the option that suits your needs and situation.
When determining how much you can afford to spend on an investment property, consider all fixed outgoings such as loan repayments and interest, council rates, insurance, land tax, property management and body corporate fees.
Also consider variable costs such as interest rates, bank charges, repairs and maintenance.
Note that stamp duty is considerably higher for investment properties.
Allow for interest rate increases and unforeseen repairs and maintenance in your calculations.
It is important you have sufficient funds available to quickly rectify any problem.
Your tenant has rights and can take legal action against you if you do not provide a safe and satisfactory accommodation / work environment.

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Who should you buy from?

In every circumstance, you should seek the independent, informed opinion of your accountant or financial adviser
Over the last few years property investment sales have increased dramatically.
While real estate agents can show you property for investment, the law prohibits them from giving you investment advice.
Developers may contact you directly with investment opportunities.
It is more common for marketing companies appointed by developers to conduct investment planning seminars to attract new investors. Many accountancy, legal and financial planning companies also invite their clients to participate in "in house" investment schemes to promote tax benefits through owning real estate.
If you are purchasing an investment property, you should fully investigate the property and likely returns before making a commitment to go to contract.
If you deal with a licensed real estate agent, stringent consumer legislation attempts to protects you from misleading conduct or misrepresentation of information.
If you deal direct with a private builder or developer you may not be eligible to the same degree of protection.
If you are approached by an investment marketing company about an investment that provides you with guaranteed returns or tax benefits, you should seek the independent, informed opinion of your accountant or financial adviser.
Don't buy property sight unseen as photographs or video can never tell the whole story.
This includes properties offered to you over the Internet, or as part of an investment sales seminar.
Avoid the temptation to join a property investment scheme because you feel coerced by colleagues or friends.
If you are buying a property in an unfamiliar area, contact local real estate agents and conduct your own market research to ensure you are paying a fair market price.
Some companies have marketed investment properties at premium prices to interstate and overseas buyers who aren't aware of local property values.
If you are purchasing through an investment marketing company or developer, organise an independent valuer to review the market value of the property, particularly if the seller is also providing finance.
Verify all information given to you regarding market rental, outgoings and potential capital growth.
Beware of agents or investment marketers promising or predicting unsubstantiated high rates of return and growth.
(If predicted returns seem too good to be true they probably are.)
In the case of guaranteed rental returns, assume the properties may not provide the same rate of return after the rental guarantee has expired.
The federal government provides depreciation benefits to investors who buy new real estate.
Ensure your agent/builder/developer provides a depreciation schedule at the time of settlement so you can avoid paying for a quantity surveyor to prepare a schedule for you.

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Licensed to deal

Real estate agents, auctioneers and their salespeople, pastoral house officers and property developers who sell more than six of their properties in a year must be licensed by the Office of Fair Trading to sell real estate.
The Office of Fair Trading reviews applications, issues licences and registration certificates and keeps details on a public register.
You can inspect and take copies of licence information from the register for a fee.
Check you are dealing with a licensee - their licence must be clearly or prominently displayed at their place of business.

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Knowing the hidden costs

It is wise to seek your own independent, expert advice.
You do not have to use the services of advisers recommended to you by the agent.
There are obligatory disclosure rules that require licensed agents and their salespeople to fully inform you of the nature and extent of any financial or other benefits they may receive from people they refer you to (i.e.. finance broker, lawyer or valuer).
Agents are also required to disclose the amount, value or nature of any benefit any person has received, receives or expects to receive in connection with the marketing, purchase or sale of the property.

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Other Disclosures

If you are dealing with a licensed property developer marketing residential property, the developer must disclose the following information to you before you sign a contract:

whether the property developer holds an interest of at least 15% in the property;
any relationship and the nature of the relationship the developer may have with professional services connected with the sale (eg. valuers and financiers);
whether the developer will receive any income or benefits from that relationship as a result of the sale; and
the amount, value or nature of any benefit any person has received, receives or expects to receive in connection with the marketing, purchase or sale of the property.

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Getting the real picture

There may be some recourse against agents, developers or sales people who make false or misleading representations about a property. If an agent provides you with information about:

the value of a property;
the property's income-producing potential;
the sales history of similar properties; and
the income tax benefits of buying a property

It should be factually correct and not misleading.
If you lose money after relying on an agent's false or misleading claims, the agent may be required by the Office of Fair Trading to substantiate any claims they may have made to persuade you to buy a property.
There are severe penalties for misleading conduct.

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When you are ready to buy

It is standard practice to negotiate contracts so negotiate rather than accept the price.
Check any Residential Property sales contract you are about to sign has a warning statement as its front page - this is a legal requirement.
If you are buying an investment property to be managed by a third party (such as a hotel or serviced apartment operator) you must first be given a prospectus and certain disclosures under the Managed Investment Act.
Consider these and seek legal advice before signing any contractual agreements with the developer or agent.
Be wary of accepting advice from advisers closely associated with the seller.

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When you are ready to sign

Follow the advice in the warning statement - seek independent legal advice and an independent valuation before you sign the contract.
Seek your own service providers (True Choice Home Loans, solicitors, valuers and building and pest inspectors) to assist you in the purchase.
Check the sales contract is accurate and you agree with its contents including conditions that give you adequate avenues to cancel.
If you are unsure, check with your solicitor before you sign the contract.
For residential real estate transactions (except auctions) there is a 5 day cooling-off period to give you time to think carefully before you buy a property.
Remember to seek independent legal advice before you sign anything.
Think carefully about the purchase during the cooling-off period (if available) and seek legal advice.
If you wish to shorten or forego the cooling-off period, ask your solicitor to issue you with a certificate.
If you want to cancel the contract during the cooling-off period, write a letter to the property developer or agent involved and make sure you deliver it before the period ends.
You will be refunded your deposit less an amount equal to 0.25% of the purchase price of the property.

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