Owner Occupied Investment Property: A Guide for Australian Homeowners Switching to Investment Property

Written by


Published on


The Australian housing market has been on a remarkable journey in recent years, with property prices experiencing steady growth in most major cities. This trend has prompted many homeowners to consider converting their owner-occupied properties into investment properties. Making the switch can be a smart financial move, allowing you to generate rental income, potentially cover mortgage payments, and build wealth for the future.

One important concept to understand is negative gearing and its potential benefits for property investors. Negative gearing can provide tax advantages and help offset the costs of owning an investment property.

When converting a home into an investment, it’s important to consider different loan features, tax implications, and potential rental income.

However, before diving headfirst into the world of property investment, it’s crucial to understand the various factors that come into play when transitioning from an owner-occupier to a landlord. In this article, we’ll walk you through the key considerations and provide actionable advice to help you make an informed decision.

Financial Affordability: Can You Handle the Costs?

One of the primary aspects to evaluate when considering the switch to an investment property is your financial readiness. Understanding the differences between owner-occupier and investment home loans is crucial, as these can significantly impact your budget and financial planning. Additionally, assessing your cash flow is vital, as it ensures you can manage the ongoing costs and maintain financial stability.

If you decide to purchase a second property to live in while renting out your current home, you’ll be faced with two mortgage payments. Alternatively, if you opt to “rentvest” – renting a place to live while your old home becomes an investment property – you’ll need to factor in both your rental payments and the existing mortgage.

Moreover, as a landlord, you’ll be responsible for the ongoing maintenance and repair costs of your rental property. While rental income can help offset these expenses, it’s essential to have a clear understanding of the potential costs involved.

To ensure a smooth transition, conduct thorough research and create a detailed budget that accounts for all the additional expenses you may incur. This will help you determine whether you can comfortably afford to make the switch to an investment property.

Rental Market Appeal: Will Your Property Attract Tenants?

It’s easy to become emotionally attached to your home, overlooking its potential shortcomings as a rental property. However, to maximise your chances of attracting quality tenants and achieving a strong rental yield, it’s crucial to assess your property’s appeal objectively.

Step back and consider your home from a renter’s perspective:

  • Location: Is your property close to public transport, shops, schools, and other amenities that renters value?

  • Condition: Is your home well-maintained, or are there any major repairs or renovations needed to make it more attractive to tenants?

  • Features: Does your property offer features that renters are looking for, such as air conditioning, outdoor spaces, or parking?

  • Rent price: Is the rent you’re planning to charge competitive with similar properties in the area?

Living Room Sofa to Relax In

Rental yield is an important metric for assessing the potential profitability of your property. By honestly evaluating your property’s strengths and weaknesses, you can set realistic expectations and make informed decisions about any necessary improvements or adjustments to your rental strategy.

Tax Implications: Understanding the New Rules of the Game

As a property investor, you’ll need to navigate a new set of tax obligations and opportunities that differ from those of an owner-occupier. Understanding these tax implications is essential for maximising your investment returns and staying compliant with Australian tax laws.

When you own an investment property, you’ll be required to pay several types of taxes, including:

  • Capital Gains Tax (CGT): Paid on any profits you make when selling your investment property.

  • Stamp Duty: A one-time tax paid on the purchase price of your property, which varies by state or territory.

  • Land Tax: An annual tax based on the value of your land, applicable in most states and territories.

  • Income Tax: Paid on the rental income you earn from your investment property.

Negative gearing is a tax strategy where the costs of owning a rental property exceed the rental income it generates. This loss can be used to offset other income, such as your salary, thereby reducing your overall taxable income. By leveraging negative gearing, property investors can potentially save on taxes while building their property portfolio.

Rental income is added to your taxable income, but deductions can reduce your taxable income, potentially saving you thousands of dollars each year.

While these taxes may seem daunting, the Australian Taxation Office (ATO) offers a range of tax deductions that can help offset the costs of owning an investment property. Some common deductions include:

  • Repairs and maintenance costs

  • Property management fees

  • Loan interest payments

  • Depreciation of assets (capital works and plant and equipment)

Changing Your Home Loan: Navigating the Transition

When you initially took out your home loan, you likely declared whether the property would be used for owner-occupation or investment purposes. This distinction is important because lenders typically offer lower interest rates for owner-occupied properties, as they are considered lower risk than investment properties. If you decide to convert an existing owner-occupied home loan to an investment loan, it’s crucial to consider the tax implications and potential financial benefits such as claiming depreciation.

If you decide to convert your owner-occupied property into an investment, it’s crucial to notify your lender and request a change to an investment loan. Failing to do so may put you in breach of your loan contract and could lead to serious consequences. Not informing your credit provider when changing from an owner-occupier loan to an investment loan can result in potential penalties. Additionally, using the equity in your home to secure an investment loan can provide significant benefits, such as leveraging your existing property to finance new investments and potentially increasing your overall return on investment.

Be prepared for potential changes in your interest rate and loan terms when making the switch. Investment loans typically come with higher interest rates and may require a larger deposit or more stringent lending criteria compared to owner-occupied home loans. Lenders perceive investment properties as higher risk because the ability to repay the loan is often

By proactively communicating with your lender and understanding the implications of changing your loan type, you can ensure a smooth transition and avoid any unwanted surprises down the line.

Maximising Returns with Depreciation: Don’t Leave Money on the Table

One of the most significant tax benefits available to property investors is depreciation. To maximize these benefits, it is crucial to have a depreciation schedule, which outlines the importance of claiming depreciation deductions. As a non-cash deduction, depreciation allows you to claim a portion of your investment property’s value as a tax deduction each year, based on the wear and tear of the building and its assets over time.

To take full advantage of depreciation deductions, it’s highly recommended to engage a qualified quantity surveyor to prepare a comprehensive depreciation schedule. This schedule will identify all the depreciable assets in your investment property, including both capital works (the building itself) and plant and equipment (fixtures and fittings).

By claiming depreciation deductions, you can potentially save thousands of dollars each year on your tax bill, significantly boosting your investment returns. For example, according to the ATO, the average depreciation claim for a residential investment property is around $8,000 per year.

To learn more about the specific items you can depreciate and the potential savings you could achieve, consult our in-depth articles on capital works deductions and plant and equipment deductions.

Key Takeaways: Making an Informed Decision

Converting your owner-occupied property to an investment property can be a lucrative financial move, but it’s not a decision to be taken lightly. Before making the switch, consider the following key points:

  1. Assess your financial readiness: Ensure you can comfortably afford the additional expenses associated with owning an investment property, such as two mortgages or rent plus mortgage payments, maintenance costs, and management fees. Additionally, consider how the investment property fits into your overall property portfolio to ensure a balanced and diversified investment strategy.

  2. Evaluate your property’s rental appeal: Objectively assess your home’s location, condition, features, and potential rent price to determine its attractiveness to tenants and its likely rental yield.

  3. Understand the tax implications: Familiarise yourself with the various taxes you’ll need to pay as a property investor, as well as the deductions available to help offset these costs.

  4. Communicate with your lender: Notify your lender of your intention to switch to an investment property and be prepared for potential changes in your loan terms and interest rate.

  5. Maximise your returns with depreciation: Engage a quantity surveyor to prepare a depreciation schedule and claim all eligible deductions to boost your investment returns and minimise your tax liability.

By carefully considering these factors and seeking professional advice when needed, you can make an informed decision about whether converting your owner-occupied property to an investment property is the right move for your financial future.

Conclusion: Taking the Next Steps with Confidence

Switching from an owner-occupied property to an investment property can be an exciting and rewarding venture, but it’s essential to approach the process with care and due diligence. By understanding the financial, practical, and tax implications involved, you can make a well-informed decision that aligns with your long-term goals and risk tolerance.

Remember, every property and investor’s circumstances are unique, so it’s crucial to seek personalised advice from qualified professionals, such as financial advisors, tax accountants, and quantity surveyors, to ensure you’re making the best choices for your situation. Additionally, consider the potential for capital growth as a long-term benefit of property investment.

At Thrifty Tax, our team of experienced quantity surveyors specialises in preparing comprehensive tax depreciation schedules for a wide range of investment properties. We work closely with our clients to identify all eligible deductions and maximise their tax savings, providing ongoing support to ensure they claim everything they’re entitled to, year after year.

If you’re considering converting your owner-occupied property to an investment property, or if you’re already a property investor looking to optimise your tax position, contact Thrifty Tax today. We’ll be happy to discuss your specific needs and provide you with a no-obligation quote for our services.

With the right knowledge, strategy, and support, switching from an owner-occupied property to an investment property can be a powerful way to build wealth and secure your financial future. By taking a proactive and informed approach, you can navigate the process with confidence and reap the rewards of successful property investment.

Ready to get your tax depreciation report?

Get a free quote and estimate below. It will only take a minute.