Moving abroad is stressful enough, and then many of us need to make a decision on whether to rent out or sell your home when moving overseas. What you should do will depend on your personal circumstances, however, we take a look at some factors you may not be aware of.
Pros and Cons of Selling Your Home When Moving Overseas
Most people decide to sell their home when moving overseas because they don’t want the hassle of managing and maintaining their property when living halfway across the world. However, most people keep their home and rent it out, so they have somewhere to live when they return to Australia.
Here are some other considerations for deciding on whether you want to sell your home when moving overseas :
- Foreign residents (including Australians living abroad) will soon lose the Capital Gains Tax exemption on houses that were formerly the person’s main residence. This includes losing the benefit of the six-year rule if the property is sold whilst the owner is a foreign resident. So if there is a chance you will want to sell your house during your time overseas, then there will be a strong tax incentive to do it before leaving Australia.
- There may be more tax-effective investments (depending on the tax regime you are moving to) or better-performing asset classes at the time you are moving overseas.
- You may want to use the money to buy a home overseas rather than renting overseas.
- Your house may be difficult to rent due to location, style of the house, etc.
- Unless you have other investment properties, selling your house in Australia will mean you no longer maintain a foot on the property ladder and are potentially exposed to getting priced out of the market during your time abroad.
- If you sell your home when moving overseas then obviously you won’t have a home to return to when coming back to Australia. For many people, with say growing families, you may well want to live somewhere else when you return, while for others, this could be quite an inconvenience. When we returned to Australia, we found not having a home to return to make our transition back to Australia much more difficult.
- Timing of your property’s sale when moving overseas could have enormous implications on the tax consequences depending on whether you are an Australian resident for tax purposes or not. Depending on your situation, you may cease to be an Australian resident for tax purposes the day you leave the country, and you may then face losing your CGT exemption on your main residence. We strongly recommend you seek personal tax advice before selling your home if you are moving or living overseas.
Pros and Cons of Renting Out Your Home When Moving Overseas
Many people (particularly those who have never owned an investment property) worry that if they rent their home to strangers then it will get damaged, or they’ll get phone calls in the middle of the night about a leaking roof, or they won’t be able to evict a bad tenant. I have personally not experienced any situation where I thought I wished I never rented out the house in my twenty years of experience owning property. Most of the issues people worry about are easily managed by appointing a good property manager or taking out appropriate insurance.
So what are the pros and cons of renting out your home when moving overseas?
- You can return to live in your home when you move back to Australia.
- You might be able to rent the house partly or fully furnished (for a slightly higher rent) and save needing to either send your furniture overseas, sell it, or store it.
- Gain access to potential tax benefits of renting out your home including rental property depreciation, tax deductions (for such things as maintenance, and property management), and negative gearing benefits from the ability to accumulate any tax losses for use when you return to Australia.
- Still exposed to potential capital growth (or loss) in the Australian property market.
- Finding a good property manager can sometimes be difficult.
- The house may not be cared for as well as you would care for your home.
- House may no longer suit your needs when you return to Australia
- Some state governments (particularly Qld and Victoria) are increasing the land tax payable by foreign resident landlords.
Eight benefits of investing in Australian property while living abroad
It is always hard to know when it is a good time to be investing in Australian property. It seems that you just need to open the newspaper, and there will be two conflicting articles on whether the timing is right for a property purchase. The reality is that in some areas of Australia, property might be at a cyclical peak while property prices could be at a cyclical low in other areas. You just need to look at Sydney and Perth. Sydney house prices have increased over 40% since 2010, while Perth house prices are moving backwards, and haven’t seen any significant increase since 2008.
So while I believe Australian property is a good long term investment, it does not mean any property will be a good long term investment. Assuming you choose your investment wisely, here are the reasons you should consider investing in Australian property as an Australian Expat:
1. Keeping a Foot on the Property Market Ladder
No matter how long you plan to live overseas, investing in Australian property (in an area where you plan to live in the future) ensures, you remain exposed to potential increases in property prices and potentially have somewhere to live when you return to Australia. If property prices rise dramatically while you are away (and history shows that prices can move very quickly at times), it may be very difficult for a non-property owner to get back in the market. Historically in Australia, well located residential property in the major capital cities has delivered good long term capital growth.
2. Rental Income
Depending on how large your deposit is, and the type and location of the property you purchase, rental income can substantially contribute to the cost of holding the property. In limited circumstances, it may be possible for your rent to exceed your expenses.
3. Tax Benefits (Australian Resident for Tax Purposes)
Tax benefits should not drive your investment decisions but be seen as an added benefit to investment – the icing on the cake. The Australian tax system provides great benefits to those people investing in Australian property (whether you are an Australian resident for tax purposes or not). Suppose you remain an Australian resident for tax purposes. In that case, you can deduct from your taxable income all of your financing costs and all the costs involved in maintaining and managing the property.
In Australia, you can also depreciate the value of the building and improvements of your property. Your depreciation benefit is dependent on a range of factors including the value of the building (excluding the value of the land) and the age of the property. A reasonably new building that cost say $200,000 (excluding land value) could reasonably be expected to have a depreciation benefit each year in the order of $5000 to $10,000 per annum.
If your income is in the top income tax bracket, then depreciation benefits might reduce your tax liability by up to $2500 to $5000 per year. Also, if you hold your investment property for more than 12 months, you are exempt from paying capital gains tax on 50% of the capital gain.
For more information on maximising your rental property’s tax benefits through depreciation, click here for my article on rental property depreciation benefits. In this article, I also include a special offer negotiated for The Australian Expat Investor’s readers to obtain a depreciation report on their property.
4. Tax Benefits (Non-Resident of Australia for Tax Purposes)
Suppose you are not an Australian resident for tax purposes. In that case, you may still claim all the deductions mentioned previously (i.e. maintenance, property management costs, and depreciation) against your Australian sourced income. If your deductions are more significant than your Australian sourced income, you can carry forward any tax losses to future income years.
As a non-resident for tax purposes, you won’t receive the 50% exemption from capital gains tax for any capital gains attributed to the period you are a non-resident for tax purposes. To understand more about the tax implications of moving abroad, download my special report – Tax Implications For Australians Working Abroad.
5. Investing in Australian Property Provides a Stable Investment
Property prices do move cyclically (and it is possible to lose money on a property investment). However, the volatility in prices is much less than say shares, gold or foreign currencies. This property characteristic is why banks are happy to lend up to 95% (but not always to expats) of the property’s value at very low-interest rates.
6. Ability to Leverage
Due to the property being a stable investment and assuming you meet the bank’s lending criteria, banks will readily lend money against the property. Relative to other loans (e.g.personal loans, credit cards, business loans, and car loans), borrowing to buy a property is very cheap, and you can borrow a large percentage of the value of the property (in some cases up to 95% of the value of the property).
Leverage provides you with the opportunity to have greater investment exposure to an asset with minimal contribution from your own funds. Obtaining finance as an Australian Expat is still possible, but it is getting harder. As a result, you are best talking to a mortgage broker that specialises in loans for expats.
All good investment strategies should include a diversified portfolio of investments. Suppose all of your investments are held in direct share investments, managed funds, or through your superannuation. In that case, you are unlikely to have any exposure to Australian residential property in your investment portfolio. Investing in Australian Property (particularly residential property) is a good hedge against the volatility in the share and currency markets, as well as being a hedge against significant increases in rent if you don’t already own your own home.
8. Ability to Add Value
One of the reasons I personally like investing in Australian property is that you are in control of adding value to your investment. With the right property selection, an owner can add value to their investment by doing a cosmetic makeover, a major renovation to the house, subdividing the land, or landscaping the garden. There are many ways an owner can add value to a property, that they cannot do with their share or managed fund investments.
As an Australian Expat, it is still possible to buy and finance a property investment from abroad.
How to ensure your home doesn’t get trashed while living abroad
One of my biggest concerns when I first started investing in residential property was that the tenants would trash my house. And if the first time you rent out your own home is when you move overseas, then the stress could be amplified.
In this article, I share what I have learned after almost twenty years of investing in residential property, how to make sure your house doesn’t get trashed while you are living abroad.
1. Rent Out Your Property
This is an ironic one to start with, but the best way to ensure your house doesn’t get trashed while you are working overseas is to rent it out. Many people I meet leave their home empty while on expat assignment because they worry about it being damaged by tenants, but they forget that :
- it is difficult or expensive to insure a house that is vacant for 60 days or more at a time
- they need to maintain the property to ensure it looks lived in, so it doesn’t attract unwanted attention
- if the property is not being used for income-generating purposes, then the interest on the home loan will not be tax-deductible
- rent can pay for the maintenance and wear & tear on the property
- you can take out landlords insurance to protect against things like malicious damage caused by tenants
- you may get caught out with additional taxes for leaving your house empty (e.g.Vacant residential land tax in Melbourne)
Many people also let friends or family live in their home, often a discounted rent and no formal lease agreement. We have all heard the advice about not lending money to friends and family, and renting a home is no different. How will you respond when your friends or family are late with the monthly rent payments, their dog is digging up the gardenor not regularly cleaning the swimming pool. Would you insist on your friends and family paying a bond, or having to sign a property condition report before they move in?
Keep your life simple and don’t rent your property to family and friends, or if you must, have them rent the house through a property manager and stay arms-length to the agreement.
2. Get A Good Property Manager
When I first started investing in property, I used to manage all my investment properties myself. It’s hard work, and even more difficult when you live overseas. A good property manager is a valuable member of your investment team, will protect the value of your investment and will also be able to deal with the other points I raise in this article.
3. Make sure your home appeals to a good tenant
Understand who the ideal tenant is for your home – considering the size and style of property, and the location. Ensure your house is well maintained and will appeal to that ideal tenant. If your home includes a swimming pool, and your ideal tenant is a young family with kids, then make sure there is adequate pool safety fences and the like installed. If your home is in a hot climate, then make sure you have airconditioning, or if your home is most suitable to a busy single professional, then make sure your kitchen includes a dishwasher.
The advantage of making sure your home appeals to a good tenant is that you will also increase the average length of tenancy, you will reduce the vacancy period between tenants, and you will be able to charge a higher rent.
4. Get A Good Tenant
If you take care of step 3, then step 4 will be a dream. An appealing home will attract a good selection of tenants. Before selecting a tenant, be sure that your property manager conducts reference checks of your prospective tenants with their previous landlords, and phones their references. Your property manager should also check the bad tenant databases, which will highlight if previous landlords have had issues with them. Note that these databases generally do not have information if the tenant was previously renting privately.
5. Collect a Bond
Tenancy laws in Australia allow you to collect a bond before the tenant moves in. This is generally around 4 weeks of rent and provides security for any damage or unpaid rent during the lease term. If you have a premium property, you may be entitled to ask for more than 4 weeks of bond. Each state has different rules about what constitutes a premium property, but it will be based on the rent for the house (e.g. if the rent is more than $1000 per week, you may be able to ask for more than four weeks bond).
6. Sign a lease agreement and make sure you have a property condition report
A lease agreement serves to protect both the landlord and the tenant. It protects the tenant by giving them a surety that they have the right to live in the property for a minimum period of time at an agreed rent. It protects the landlord by giving them a surety that they will receive a given amount of rent for a minimum period of time.
A property condition report also serves both the tenant and the landlord. It protects the tenant by ensuring the landlord doesn’t claim damage against the tenant that was already pre-existing and protects the landlord against any damage the tenant may do to the property. A good property condition report should include both a detailed written description of the property (including the conditions of all walls, curtains, carpets, appliances etc.) and photos of the property. A good property condition report in my mind doesn’t need to go overboard on the photos either (like the one we received when we returned to Australia and initially rented), but generally, show the condition of the property and highlight any specific features or pre-existing damage.
7. Undertake Regular Property Inspections
The only way you are going to know whether your property is being cared for is if the property manager undertakes regular property inspections – I would suggest around every 3 or 4 months. If there are any problems, your property manager can seek to address them in a timely manner, including breach notice and termination proceedings if necessary.
8. When All Else Fails – Have Landlords Insurance As a Backup
Doing everything we have discussed above will reduce the risk of dodgy tenants and damage being done to your property. However, you should also consider taking out landlords insurance to cover the unexpected.
When you move out of your home and rent it out, you will need to advise your insurance company that the house is now a rental property. You can then adjust your contents insurance to cover the contents remaining in the property and also take out landlords insurance. Most insurance companies offer a landlord’s insurance, and there are many sub-options to consider. You can take out specific cover for your tenants’ malicious damage, rent default, loss of rent (in the event your house becomes uninhabitable through say fire or flood), and legal liability.
The terms of the landlord insurance policies vary greatly, so be sure to read the fine print and understand the exclusions.