Should you consider buying an investment property interstate?
I often get asked this question.
Some people say you should only buy within the area you live in because you are familiar with the prices, can drive past to inspect the property and if required make your own repairs.
While all those reasons have merit, the answer goes far beyond this.
There are several really important reasons why you should invest in properties interstate, and it’s more about good investment principles than convenience.
1. Ride the property wave
The property cycle moves differently in different states. When one state is at the top of the property cycle other states could be at the bottom. You should buy at the bottom of the wave and ride the property wave.
2. The property clock
The property market moves through a cycle and when things are booming in Victoria they may not be booming in NSW. When they are slow in Perth they might be booming in South Australia.
Currently Melbourne is oversupplied, Sydney is “steady as she goes”, Queensland is at the bottom of the cycle but the Gold Coast is anticipated to stay at the bottom for many years to come, while Brisbane is showing signs of life. Perth is steady as she goes, and so on.
As you can see, each state is at a different part of the cycle, so it’s important you time the purchase at the bottom of the cycle.
Buying in your own suburb or state might not be the proper thing to do if you are at the top of the cycle.
3. Land tax
Each state has different land tax rules and allows a certain land tax threshold before land tax is payable.
Once you have “used up” your land tax threshold in one state by having several properties held in that state, further properties in that state will attract higher rates of land tax.
If you then buy in another state, the land tax threshold starts again.
Hence another reason to buy in other states is because of the land tax you are prepared to pay.
If you carefully manage the timing of your new purchases you could buy both at the bottom of the cycle and minimise your land tax by buying in the right state at the right time.
For example, while the property cycle suggests Brisbane is at the bottom right now and may be the best place to buy your next investment property, if you already have several properties in the state of Queensland and have breached the land tax threshold in Queensland.
Further properties bought in Queensland (whether they are in Brisbane, Townsville or the Gold Coast) would incur excessive land tax.
In this instance, you should consider investing in another state that is at or close to the bottom of the cycle and one where you have not used up the land tax threshold yet.
In the above example you may consider buying in Darwin if you have no properties there, as you have the full Northern Territory land tax threshold to take advantage of.
Therefore, careful management of your property investment strategy could mean you pay no land tax at all, even while holding over a dozen or so properties.
Wouldn’t that be good?
Just as it’s important to diversify your share portfolio it’s also important to diversify your property portfolio.
Diversification means that when some properties are slowing down in some states you should have properties in other states that are growing.
This will also help manage your bank’s stress levels because while some properties they hold as security are going down in value the other ones they are holding may have gone up.
Risk management is about ensuring your banks do not force you to refinance when the market values are down or you are forced to sell properties when the market is down.
While there are emotional reasons for investing in the state or suburb you feel most comfortable in, investing is much more scientific than using one’s “feelings”.
It’s always best to use professionals to assist in property selection because they have the research material to determine where you should be investing.
Timing is so important because the market could change within months.
Get a property accountant to assist you with buying it in the right structure to minimise tax and give you the flexibility should your circumstances change in the future.
Non-Executive Chairman, Chan & Naylor
Dislcaimer: If you intend to rely on any of the information in this article to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its’ officers, employees, directors or agents.