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Do the maths on rental property.
Need a home loan to buy an investment property? It can be a big financial commitment, so it's important to see if the numbers work for you.
Things to consider.
Borrowing to invest
You could use part of the equity in your home to borrow for an investment property.
Depending on what's happened in the property market, you might be surprised by how much equity you've built up in your home.
What is equity?
Your equity is based on the difference between what your property is worth now and the size of your home loan.
You could then use this equity to get a loan on your investment property. Just note that any new lending will still need to meet the Loan-to-Value Ratio (LVR) restrictions and Westpac's home loan lending criteria.
Investment returns
There are two types of returns to consider when choosing an investment property - capital gain and yield from rental income.
1. Capital gains
Capital gains are earned when you sell a property for more than what you paid for it. Rules around the potential taxation of capital gains can be complicated. We recommend you always speak to your tax adviser when you buy or sell an investment property.
2. Yield from rental income
A key consideration is calculating what you could earn from renting out your property. Do this by looking on property websites to see what similar properties are rented for. You could also ask a rental agency to do an appraisal for you. A property for sale will often already have an appraisal prepared by its agent, however it might be worth getting an appraisal done by an impartial agency.
You could increase your yield by finding a property where minor, low-cost improvements may allow you to recover a higher rent. Improvements such as painting it or adding a bedroom, carport, deck or an outdoor living area could make it more appealing to tenants.
Expenses to consider
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Ongoing expenses |
Purchase and set-up expenses |
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Interest costs on your loan. |
Lawyer's fees. |
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Property management (if you choose not to manage the property yourself) - generally ranging from 8-10% of the rental income. |
Accountant or tax adviser fees. |
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Rental property insurance that covers the extra risks of owning a rental. |
LIM (Land Information Memorandum) report. |
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Insurance for you - such as life and income protection insurance, depending on your personal situation. |
Building inspection report. |
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Repairs and maintenance. |
Engineer's report. |
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Council rates. |
Valuation fee. |
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Body corporate expenses, if applicable. |
Your share of rates pre-paid by current owners. |
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Ground rent, if your property is leasehold. |
Purchase of whiteware, if you're planning on supplying this. |
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Ongoing professional service fees (accountant, tax adviser etc.). |
Any initial repairs or upgrades you want to do |
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Cleaning between tenants. |
Any time where the property is untenanted. |
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Gardening and lawns. |
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Travel costs to your property. |
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Water bills. |
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Vacant properties
While a vacant property isn't a direct expense, keeping tenants can sometimes be challenging. It's worthwhile budgeting to allow for any potential loss in rental income from having a vacant property every year.
Tax
Owning a residential investment property has tax implications. Income generated from rent is taxable, which means you'll need to complete a tax return each year. Gains from the sale of a property may also be taxed.
Tax rules often change and can be complex, so it's essential to get regular guidance on your personal circumstances from an independent tax adviser or accountant. You can also find a tax guide on rental income on the IRD website.
Gearing
When you borrow money to invest in residential property, loan repayments and other expenses can be higher than your rental income. In this situation you are negatively geared. Because of this, you may have rental tax losses, which will generally need to be carried forward to later tax years.
If your rental income is higher than your expenses, then you are positively geared. Rent is an income source, and therefore it's taxable.
There may be benefits to both scenarios but your individual circumstances and the property you're looking to purchase will dictate which is the best investment strategy. Make sure you consult an independent tax adviser, accountant or financial planner to understand all the tax considerations for your situation before you start investing in residential property.
Calculators.
Get in touch.
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Existing customers can apply for a home loan via Westpac One® online banking.
Things you should know.
The material on this webpage is provided for information purposes only and is not a recommendation or opinion in relation to property investments or home loans. The information on this webpage does not take your particular financial situation or goals into account.
Westpac accepts no responsibility for the availability or content of any third party websites to which this page may refer.
Westpac's home loan lending criteria, terms and conditions apply. A low equity margin may apply.