4 Key Mistakes First Timers Make in Purchasing Their First Investment Property

You might be a first timer. We all were at one stage to be honest. But you don’t need to make the same mistakes many first timers do.

Getting the legal structure right from the beginning.

You find your first investment property and are so excited to finally get into the property game after all that time. So Peter and Paul go out and purchase things 50/50 which is something I see everyday. Now that may well be the right option. But have they considered whether it is better to

  • purchase in one name only or with one party holding at least 1%
  • purchase through a trust (could be either a unit trust or a discretionary trust)
  • purchase through a company

There is actually no right or wrong answer to be honest. It can depend on various factors such as whether they operate a business and are at high risk, or whether they have considered tax strategies later on such as a spousal sale or sale to a related trust later on.

Maybe they want to move it into a self managed superannuation fund later on. A unit trust may well allow them this option.

So consider the legal structure first.

Setting up the loans correctly

Frequently we see the loans being set up as simple investment loans against the property. No offset accounts.

Setting up your loan structure correctly from the beginning can provide you with a wealth of flexibility later on.

In many cases the tax differences between one loan structure and the other can result in thousands or tens of thousands of dollars in different tax outcomes.

Paying the Deposit in Cash

Ok, sometimes it is unavoidable but if it can be avoided please do. Many people pay the deposit in cash and then reimburse themselves once they get the full loan.

They don’t realise that they have just lost interest deductibility on a significant part of the purchase price.

Not seeking professional advice

Now this isn’t a blatant plug for our services but so often people jump into one of the biggest investments of their lives without seeking professional advice.

This ties back to the legal and loan structures and also the tax implications of things.

  • did you know you can no longer claim travel to inspect the property
  • you might be able to get a significant tax benefit without outlaying any cash by obtaining a tax depreciation schedule
  • your lenders mortgage insurance costs might be able to be claimed over time
  • if you purchased the property in the ACT you might be able to claim a full deduction for the stamp duty on acquisition

So don’t be caught out as a first timer. It’s an exciting journey the property investing journey but wise to jump into it well prepared.

If you are looking for an investment property accountant based in Melbourne give us a call