How to make your rental property work harder - Part 2

In part 1 of my two part column we looked at ways to improve the rental yield on your investment property. Strategies included making a good first impression and focusing on the little things, furnishing the property, investing in bigger ticket items, renovation and securing longer term tenants.

Now let’s turn our mind to reducing operating and holding expenses. Here are my top five cost savings tips:

1. Borrow wisely

Interest and associated borrowing fees are by far the biggest expense property investors incur. Take out the wrong loan and you could be thousands of dollars out of pocket not to mention your investment strategy could be undermined.

The present lending market is ideal for investors – low interest rates and considerable competition among lenders, especially the non-bank lenders. So there is no shortage of options when it comes to investment property loans. When choosing your loan, you should consider the following questions:

• Is it competitive and cost effective taking into account the interest rate and ongoing fees?
• Is it flexible – can you make accelerated or lump sum payments easily?
• Is it aligned with your investment strategy – will it support your investment time horizon? For instance, don’t take out a ten your fixed rate loan when you expect to sell the property in seven years.
• Does the borrowing structure support your tax position? Is an interest only or interest and principal loan the best option?

2. Choose your property manager carefully

The right property manager can make a big difference to the success of your investment. Attracting and retaining the right tenants, rent collection, overseeing ongoing repairs and maintenance work and carrying out regular inspections are some of the key responsibilities they undertake which not only helps maximise your rental income but helps protect your property from damage and the effects of wear and tear.

When selecting your property manager you should not only research, review and compare commission levels and other costs (which could significantly eat into your rental income if they are unreasonably high) but also their track record, knowledge of the market and renter preferences, as well as their connections with quality and competitively priced tradespeople.

3. Maximise the property’s depreciation allowance

Most investors understand the concept of depreciation but not everyone gets the maximum benefit meaning they are not minimising their tax liability.

In general terms properties built after July 17, 1985 are eligible for a depreciation allowance of 2.5% of the original construction cost a year for up to 40 years. So for a dwelling on a land which cost $200,000 to build, you could claim $4,000 a year depreciation as a tax deduction.

For all properties fixtures and fittings can be depreciated in line with the rules set by the Australian Taxation Office (ATO). Interestingly not all allowable depreciation claims are made because owners are not always aware of what can and can’t be included, especially for older properties. And this includes major renovations of a capital nature. For this reason it’s a good idea to appoint a quantity surveyor who can inspect the property and prepare a depreciation schedule which will normally be acceptable to the ATO.

It’s important to remember that depreciation (and other property expenses) can only be claimed for the period during which the property was rented or available for rent, so this needs careful attention. In addition, the tax treatment of repairs and maintence and capital improvement is quite different with the earlier an immediate deduction and the latter a possible depreciable item. Your accountant or financial adviser should be able to help you maximise your allowable deductions and, in conjunction with the quantity surveyor, identify all depreciable items.

4. Carry out timely maintenance

This is a case of spending money to save money. Fixing a small problem now can save big money down the track. For instance a broken or cracked roof tile which is easy and cheap to replace could lead to major internal damage due to the effects of rain over time, as could leaking or worn plumbing. So the rule is to fix the small things before they become big problems.

Additionally, failure to adequately and reasonable fix maintenance problems on a timely basis could not only breach the lease contract but could also lead to a loss of good tenants, neither of which would be a desirable outcome.

It’s also a good idea to take adequate property and landlord insurance to help protect you against major repair bills and damage caused by renters.

5. Adequate tax planning

Before buying your investment property it would be wise to seek independent tax advice to ensure the transaction is structured in the most tax efficient way. This means ensuring the purchase is made through the appropriate entity, for instance through a trust, company or personally and in consideration of protecting the current CGT concession.

In addition, it’s important to ensure that all allowable property expenses are duly claimed to help reduce your tax expense. The ATO provides a useful list which includes items such as: advertising for tenants, bank charges, body corporate fees and charges, cleaning, council rates, electricity and gas, gardening and lawn mowing, insurance (building, contents, public liability), interest on loans, land tax, lease document expenses (preparation, registration, stamp duty, legal expenses), mortgage discharge expenses, pest control, property agents fees and commissions, quantity surveyor’s fees, secretarial and bookkeeping fees, security patrol fees, servicing costs (e.g. servicing a water heater), stationery and postage, telephone calls, travel and car expenses in relation to rent collection, inspection of property and maintenance of property.

By combining strategies to increase rental yield and minimize holding and operating costs, you’ll not only go a long way to making your investment property more financially viable and less of a cash flow burden while you’re renting it out, but you could add greatly to its appeal and sale price when it comes time to sell.

Peter Boehm is the Consulting Finance Editor with onthehouse.com.au which offers a unique information source on virtually every property in Australia and provides data on a property’s sold and rental history as well as current property valuations. The onthehouse.com.au Investor Centre provides research on suburbs, market update reports and calculators to help investors make informed property decisions.