Five property investment tips for business owners

Could you build a property portfolio while running a business? If you're busy managing day-to-day responsibilities, it's easy to overlook property investment opportunities, but an additional income stream could help drive business growth.

Why invest in property?

A property investment can provide cash flow, maximise income tax return, and be borrowed against if necessary.

Business and finance

Entrepreneurs are well known for pouring their hard-earned dollars back into their businesses. But setting aside some funds to invest in the Australian property market can provide finance for business development.

Tony Morgan, a regional manager with NAB, manages relationships with all kinds of entrepreneurs. He says, “The majority of the clients I see that are successful - they create wealth and make money out of property investment outside their core trading business.”

Here we look at five things business owners might consider when they're looking at ways to invest in property.

1. Know your objectives

There are different properties for investors with different needs.

Morgan asks: “Are you looking for future capital growth from your investment property, or are you looking at an additional income stream? It is common with property to get one or the other, but it’s challenging to get both.”

Those whose cash flow is a little tight may look for a cash-generating property with a higher rental yield, such as an inner-city apartment. If cash flow isn’t an issue, you could shoot for the bigger prize of capital growth. You can do this by selecting a property with a greater land component. Well-chosen houses typically cost more than apartments and generate a lower rental yield, but they show better long-term capital growth, Morgan explains.

2. Consider your time

Business entrepreneurship takes up a lot of time. While those with a passion for renovation might try to raise their capital growth upside by purchasing a ‘fixer-upper’, most will want something less involved.

A thorough inspection from a professional can highlight maintenance issues you might not have considered. You will want to know if the house is old and needs rewiring, or has things like early-stage rot in the floorboards.

If you plan to live in the house, is it a long commute from where you work? Does it have a high maintenance garden that may whittle away at your leisure time?

If you plan on renting it out, a good property manager can act as your rent collector, bookkeeper and property inspector rolled into one.

3. Enjoy the full benefits

If you're living in the property as an owner-occupier, you'll enjoy an exemption from capital gains tax when you sell. Plus, you may find it easier to get a mortgage. You might even be able to access the First Home Owner Grant, opens in new window.

But chances are as a business owner, investment properties will offer more ways to increase your tax refund. You may be able to secure an interest-only loan and claim a range of deductible expenses on investment properties like interest, maintenance costs and rates.

Negative gearing can also help you maximise your tax return. Make sure you make the depreciation deductions you can to maximise the advantage of negative gearing.

“Depreciation is an item you expend off the rental income, but it’s not an expense where you have actually handed money out,” Morgan says.

4. Time it right

Dips or shocks to property valuation do happen. While good property historically bounces back, you only get the benefit if you can continue to hold the asset long term.

Morgan says a degree of boldness is necessary for successful property investors, but they should also be comfortable in the sustainability of their income.

“The people I have seen be successful in property are cognisant of affordability, and not just housing affordability but whether their cash flow is able to sustain their investment.”

Timing the market well can bring forward the day when you start to enjoy a large equity cushion. This brings freedom and flexibility, he says. Owners of businesses in counter-cyclical industries such as health, education and insurance could buy prime property during downturns when prices are lower.

5. Do your research

Smart property investment means making informed choices. There are many resources available today for property research that can put you in a better position to negotiate. Online services can tell you a property’s sales history and give you a list of similar properties in the area and what they sold for.

Is the median price in the suburb you are considering rising, flat lining or falling? How has it historically weathered downturns such as the financial crisis? Are the number of homes for sale in the area rising or falling?

Look at tenant demand if you plan to rent it out. If the market in a certain locality has an excessive supply of residential units, for example, the property could be harder to fill.

And be across your potential running costs, Morgan says. “Make sure you are aware of council rates, body corporate fees, management and letting fees.”