Australia is one of the top tourist and immigration destinations for Singaporeans. Some of us may have family living in Australia, studied in Australia or are planning to migrate to Australia. This familiarity with Australia may spark your interest in investing in Australian properties.
But before you do so, it’s worth noting that buying a property in Australia, whether for your own use or for investment purposes, is different from buying a property in Singapore. In this article, we identify 5 things to look out for when buying properties in Australia.
#1 Restrictions On Foreign Buyers
Australia has strict restrictions on foreign buyers for property purchases. Foreign buyers or non-resident buyers may only buy new or pre-constructed developments (also marketed as off-the-plan properties). Non-resident buyers are subject to the Foreign Investment Review Board (FIRB)’s approval and the application must be submitted before the purchase of the property. Most property developers and agents would help you with the process and the application is usually approved within 30 days.
Depending on the state that you are planning to invest in, there may be state-specific stamp duties imposed on foreign buyers. For example, buying a property in Melbourne (in the state of Victoria) will incur foreign purchaser additional duty of 8%, whereas buying a property in Perth (in the state of Western Australia) will incur foreign buyers duty of 7%.
To counter this, property developers may offer discounts such as FIRB rebates or stamp duty rebates to attract overseas buyers.
Note: Foreigners who reside in Australia (such as international students or those working in Australia) are considered resident buyers and allowed to purchase existing properties on the market. They need not seek FIRB’s approval. However, they are subject to other restrictions such as selling the property when they leave Australia. Do check the various state requirements if you belong to this category of foreign buyers.
#2 Mortgage Financing
Unless you are paying with cash, you are most likely going to need a mortgage to finance your new property purchase.
Do note that Australian banks may be less willing to lend, impose more restrictions or offer less attractive rates to foreign buyers. For example, they may discount the income you earn in your home country in their mortgage calculation as compared to income earned in Australia.
In general, do seek the advice of an experienced mortgage broker if you are intending to finance your mortgage with an Australian lender.
Alternatively, most of our local Singapore banks are familiar with lending for Australian properties. Do speak to the banks’ mortgage specialists to see if they can make you an attractive mortgage offer.
#3 Property Management
Property investing usually involves acquiring cash flow by renting out the property. This would mean you need to be familiar with how to manage the property and the tenants. While you can (and usually will) engage a property manager to do this on your behalf, you still need to be familiar with the norms of property management in Australia. For example, in the state of Victoria, rental bonds (or the equivalent of security deposits) are lodged with the state-managed Residential Tenancies Bond Authority.
If you are managing an apartment, you will also need to be aware of rules and regulations of the owners’ corporation (or the equivalent of our condominiums’ management committees). Additionally, different states may have additional regulations such as smoke alarm regulations. Landlord’s insurance is also an essential if you are renting out your investment property.
In general, it is much easier to engage a property manager to manage your investment property if you are not residing in the same state. Your property manager can act on your behalf to market and lease the property as well as manage any associated expenses.
Typical management fees range from 4% to 8% with lower fees for multiple properties. For example, if you rent out a property for $500 per week or $2,000 per month, the management fee would be about $160 per month, meaning your rent collected is only $1,840 per month which will impact your overall rental yield. In general, a property manager will manage the process of marketing and leasing to new tenants, conduct background checks on potential tenants, manage any tenant matters including organising any necessary repairs and conduct regular inspections of the property. They can also attend owners’ corporation meetings on your behalf, represent you in any dispute with the tenant and manage any property expenses incurred such as owners’ corporation fees.
#4 Tax Implications
While the yield for Australian properties may look attractive, do keep in mind that non-residents are taxed on their Australian derived income, including rental income. This is 32.5% for income up to $90,000 and the tax rate increases as you go up the income band. Your property manager will prepare a property statement which you can use in your tax filing.
An accountant familiar with Australian taxes will also be able to assist and optimise your tax filing. For example, obtaining a depreciation schedule for tax deductions. The Australian tax system also has different tax treatments for investment and resident properties. For example, the mortgage payment for investment property may be tax deductible but not exempt from capital gains tax.
Additionally, there may be additional duties or surcharges depending on the state. For example, Victoria imposes an absentee owner surcharge of 2% for properties where the owner is deemed as absent from Australia during the year.
These duties, surcharges and taxes will eat into the rental yield or possible capital gains of your Australian property investments and you should include them into your investment evaluation.
For example, a one-bedroom apartment in Melbourne is marketed as having 8% rental yield. After finalising the mortgage and acquiring a tenant, the actual rental yield is actually 6.3% after deducting all the expenses. Assuming that you are not eligible for further tax deductions, your net rental yield will be around 4.3% after tax.
Note: This is just an illustration and is not representative of the current market situation or potential rental return.
#5 Forex Risk
Finally, any overseas investment will have the additional element of forex risk. Given the high capital cost of property investment, this forex risk is amplified.
The Australian Dollar is currently low (AUD 1.03 to SGD 1) in comparison to the Singapore Dollar and this makes investing in Australian properties look attractive. However, this may not hold true in the future. It is possible that the Australian Dollar will go even lower or it may rise higher, compared to the Singapore Dollar. This is something that you need to be aware of, especially if you are financing a mortgage in Australian Dollar.
For example, if the AUD appreciates against the SGD (AUD 0.97 to SGD 1), this means you will need to pay more SGD each month to service your mortgage which is priced in AUD.
Aside from doing the homework of finding a good location and property to invest in, investing in Australian properties will require you to have additional knowledge about Australia’s tax system, mortgage financing and property market. It will also require you to have an awareness of the exchange rates between Australian Dollar and Singapore Dollar. With care, you can expand beyond investing in properties in Singapore to investing in properties in Australia.
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