Don't dive in until you've checked out the fine print
Kliger, a principal lawyer at Kliger Partners Lawyers, says property investors need to do more than just find a good-looking investment opportunity and then arrange finance.
One of the biggest pitfalls they face is that the body corporate may not be well run and could add greatly to their costs.
Property specialists say investors should pay attention to a number of other issues when they invest.
These include getting the right kind of insurance; keeping good records for tax; and if they have bought a commercial property, working out what to do with goods that are abandoned by tenants.
Kliger says when investors buy into a strata or community title they are also buying into a management contract that the body corporate has arranged. "The cost of these can be horrific," he says. "You rarely get much information about this and it is your job to make some inquiries, even if that means knocking on doors to ask questions. You have to try and find out what it is like to live there and what it costs."
When it comes to insurance, the managing director of market researcher BDRC Jones Donald, Roger Donbavand, says there is a marked difference between the behaviour of professional property investors and "self-managed" investors.
A survey of 500 landlords by BDRC Jones Donald found 81 per cent of professionally managed properties were covered by some form of insurance such as building cover, malicious or accidental-damage insurance or rental-income protection.
Only 54 per cent of self-managed landlords had their property insured. Donbavand says low rental vacancies have made some landlords complacent. Landlord insurance specialist Terri Scheer Insurance reports income claims are common.
Forty-five per cent of the claims it processed last year were for lost rental income - usually as a result of tenants defaulting or absconding.
Sydney financial planner Paul Hudson says another valuable form of insurance for investors using debt to fund an investment, which is usually the case with property, is to make sure they have some cash back-up.
Hudson, a principal of Hudson Gore Financial Planning, insists his clients have some spare cash flow to deal with contingencies, especially in situations where the property is negatively geared (where borrowing costs exceed rental income).
He tells clients that if cash is going to be tight, a geared investment strategy is not for them.
Non-profit group Taxpayers Australia says it is important for property investors to get advice on what deductions they can and can't, claim, and then keep good records.
The organisation warns this is an area where investors often make mistakes.
For example, it says investors often fail to claim travel expenses involved in inspecting their investment properties. There are also costs involved in collecting rent, showing prospective tenants through a property, and dealing with agents that are sometimes overlooked at tax time.
Investors can claim the interest cost on borrowings used to fund their investment, as well as the cost of repairs. The rules can be complicated.
Deductions are not allowed for periods of free occupation, for instance, so if family or friends are staying in your rental property you can't claim the interest expense for that period. Another complication is the Australian Taxation Office makes a distinction between repairs, which are deductible in the year the cost is incurred, and improvement, which affects the capital gains tax you pay when you sell the property.
These deductions can only be claimed when the property is sold.
Investors who buy commercial property often have to contend with abandoned goods in the building.
A tenant might, for example, be running a cafe or deli, and if the business fails, the tenant might walk away from the lease leaving valuable cooking and refrigeration equipment behind.
Kliger says landlords and tenants can set out in a lease how any abandoned goods are to be treated but few think to do so.
"The lease can include an agreement that simply states that all goods left on the premises will be regarded as immediately abandoned and can be sold or disposed of," he says.
"If there is no written agreement between landlord and tenant, the landlord will have to go through a much more time-consuming process to dispose of the goods.
"This might involve giving notice of up to 28 days before disposal and also searching the Personal Property Securities Register to find out whether any other person, such as a lender, has a registered interest in the goods.
"This process will compromise the landlord's ability to re-let the premises."
Frequently Asked Questions about this Article…
Ask detailed questions about how the body corporate (owners' corporation) is run. The article warns that sale materials often omit information about management, budgets and ongoing costs. Knock on doors, speak to current owners, request meeting minutes, budgets and the management contract so you understand living conditions and likely fees before you buy.
When you buy into strata or community title you also 'buy' whatever management contract the body corporate has arranged. The article quotes a property lawyer saying those contract costs can be high and are rarely disclosed up front, so you should inquire about management fees, cleaning, maintenance and contract terms to avoid unexpected expenses.
Common types of cover mentioned are building insurance, malicious or accidental-damage cover and rental-income protection. The article highlights that professionally managed properties are much more likely to be insured and that rental-income protection is particularly important when tenants default or abscond.
A BDRC Jones Donald survey of 500 landlords found 81% of professionally managed properties had some form of insurance, versus 54% for self-managed landlords. The article also notes a landlord-insurer reported 45% of its claims were for lost rental income, underlining why rental-income protection can be critical.
The article advises having spare cash flow to cover contingencies because property investments are commonly debt‑funded and can be negatively geared (borrowing costs exceed rental income). A financial planner quoted says if your cash will be tight, a geared investment strategy may not be suitable.
Taxpayers Australia recommends getting professional advice and keeping good records. You can generally claim interest on borrowings used to fund the investment and the cost of repairs in the year they occur. Also track travel to inspect the property, time and costs for collecting rent or showing tenants, and agent fees—these are commonly overlooked deductions.
According to the article, the ATO treats repairs as deductible in the year the cost is incurred, while improvements are not immediately deductible and instead increase your property cost base for capital gains tax when you sell. That distinction can change your immediate tax deductions and future CGT liability.
The article recommends including a clear lease clause stating goods left on the premises are immediately regarded as abandoned and can be sold or disposed of. Without a written agreement landlords must follow a more time‑consuming process (possibly up to 28 days' notice) and check the Personal Property Securities Register for third‑party interests, which can delay re‑letting the space.
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