Moving abroad is stressful enough, and many of us need to decide what to do with our home when moving overseas; rent or sell? Of course, the best decision depends on your circumstances. Let’s look at some factors for each that you may be unaware of.
Pros and Cons of Selling Your Home When Moving Overseas
Many people decide to sell their homes when moving overseas because they don’t want the hassle of managing and maintaining their property while away. However, a significant number of people keep their home and rent it out so they have somewhere to live when they return.
Here are some pros and cons to help you decide if selling your home when moving overseas will work for you:
- Foreign residents can no longer claim Capital Gains Tax exemption on houses that were once their main residence. If you are likely to sell your house during your time overseas, then there is a strong tax incentive to do it before you leave Australia.
- Depending on the tax regime of your new home country, there may be more tax-effective investments or better-performing asset classes.
- You may want the capital to buy a home overseas rather than rent it abroad.
- Your house may be challenging to rent due to it location, style, or other factors.
- Selling your house in Australia may mean you lose your position on the property ladder if this is your only property. You may be priced out of the market by the time your return.
- If you manage to sell your home when moving overseas, you won’t have a home to return to when coming back to Australia. For many people with growing families, you may want to live somewhere else when you return, while for others, this would be inconvenient. Not having a home to return to can make the transition back to Australian life more difficult.
- The timing of your property’s sale could have significant implications on your tax if you are an Australian resident for tax purposes. You may even cease to be an Australian resident for tax purposes the day you leave the country, losing your Capital Gains Tax exemption on your main residence. It is recommended you seek personal tax advice before selling your home before you begin to plan to move to a new country.
Pros and Cons of Renting Out Your Home When Moving Overseas
People who have not yet owned an investment property may worry about renting their home to strangers. Property damage, ongoing maintenance and bad tenants who may not leave are high on the list of concerns. Most of these issues are easily managed by appointing a good property manager or taking out appropriate insurance.
The pros and cons of finding tenants for your property when overseas are:
- You have an abode to return to when you move back to Australia.
- You may be able to rent the house partly or fully furnished (for a slightly higher rent) and avoid sending your furniture overseas, selling it, or storing it.
- Gain access to tax benefits of renting out your home, like rental property depreciation, tax deductions (for maintenance and property management), and negative gearing benefits.
- You’ll also benefit from the ability to accumulate any tax losses for use when you return to Australia.
- You are still exposed to potential capital growth (or loss) in the Australian property market.
- Finding a trustworthy, reliable property manager can be difficult.
- The house may not have been as well cared for.
- The property may no longer suit your needs when you return.
- Some state governments (particularly Queensland and Victoria) have increased land tax payable by landlords residing overseas.
Eight Benefits Of Investing In Australian Property While Living Abroad
It’s difficult to know when the time is right to invest in Australian property. When you do decide to do some research or catch up on the news, you’ll find conflicting articles on when the timing is right for a property purchase. In some areas of Australia, the market might be at a cyclical peak, while property prices in other regions could be at a cyclical low.
Look at Sydney and Perth prior to the pandemic. Sydney house prices had increased over 40% since 2010, while Perth house prices moved backwards since 2008.
While Australian property is a good long-term investment, it does not mean every property will be a good long-term investment. If you choose your investment wisely, you can enjoy these positives as an Australian expat:
- Keeping a Foot on the Property Market Ladder
Investing in Australian property and in an area where you plan to live in the future ensures you’re well set up for your return. You’ll remain exposed to potential increases in property prices and potentially have somewhere to live when you return. If property prices rise while you are away (and history shows that prices can move very quickly at times), it may be difficult for a non-property owner to get back into the market. Historically in Australia, well-situated residential property in the major capital cities has delivered good long-term capital growth.
- Rental Income
Depending on your deposit size, the type and the location of the property you purchase, rental income will contribute to the cost of holding the property. In some circumstances, your rent may even exceed expenses.
- Tax Benefits (Australian Resident for Tax Purposes)
Tax benefits shouldn’t drive your investment decisions but rather provide an added benefit to the investment. The Australian tax system greatly benefits those investing in Australian property. And this is whether you are an Australian resident for tax purposes or not.
If you remain an Australian resident for tax purposes, you may deduct all of your financing costs and the costs involved in maintaining and managing the property from your taxable income.
In Australia, you can depreciate the value of the property and any improvements. Your depreciation benefit depends on several factors, including the building’s value (excluding the value of the land) and the property’s age. A new construction that costs approximately $200,000 (excluding land value) could have a depreciation benefit each year from $5,000 to $10,000 per annum.
If your income is high; in the top income tax bracket, then this may reduce your tax liabilities by approx $2500 to $5000 per year. If you hold your investment property for over 12 months, you are exempt from paying Capital Gains Tax (CGT) on 50% of the capital gain.
To understand the nuances of maximising your rental property’s tax benefits through depreciation, make sure you are well-versed on rental property depreciation benefits.
- 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.
- Investing in Australian Property Provides a Stable Investment
We all know by now that property prices move cyclically (and it is possible to lose money on a property investment). However, the price volatility is much less than shares, gold or foreign currency. This 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.
- Ability to Leverage
Because the property market is considered to be a stable investment, and assuming you meet the bank’s lending criteria, banks are likely to lend money against a property. Unlike other loans (including personal loans, credit cards, business loans, and car loans), borrowing to buy a property is very cheap. It’s even possible to borrow a large percentage of the property’s value. In some cases, it can be as high as up to 95% of the value of the property.
Leverage allows 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 difficult. We recommend speaking with a mortgage broker specialising in expat loans.
Every good investment strategy will include a diversified portfolio of investments. If all your assets are in direct share investments, managed funds, or via superannuation, you won’t have vital exposure to Australian residential property in your investment portfolio. Investing in Australian residential property is a good bet against any volatility in the share and currency markets and against significant increases in rent if you don’t already own your own home.
- Ability to Add Value
One of the reasons investors like Australian property is that they are in control of adding value to their investment. With robust property selection, an owner can add value to their acquisition by renovating, redecorating, subdividing the land, or landscaping the external areas. An owner may add value to a property, unlike their share or managed fund investments.
As an Australian expat, buying and financing a property investment while abroad is still possible.
How to ensure your home doesn’t get trashed while living abroad
Let’s break down the top ways you can avoid undue stress while living overseas while your tenants reside on your property.
- Rent Out Your Property
Renting it out ensures your house doesn’t get trashed while working overseas. Many people leave their homes empty while on expat assignment because they worry about tenant damage, but they forget that :
- it is difficult and expensive to insure a house that is vacant for 60 days or more
- they need to maintain the property and ensure it looks lived in to divert unwanted attention
- the interest on the home loan will not be tax-deductible if the property is not being used for income-generating purposes
- rent can pay for the maintenance and wear and tear on the property
- landlords’ insurance protects against malicious damage caused by tenants
- you may be faced with additional taxes for leaving your house empty
It’s common to allow friends or family to move in, often at a discounted rent and without a formal lease agreement. Remember the advice about not lending money to friends and family? Renting a home is no different. What if your friends or family are late with the monthly rent payments, their dog is digging up the garden, or they forget to clean the spa? Would you insist your friends and family pay a bond or have them sign a property condition report before they move in?
Keep your life simple and avoid renting your property to loved ones. Or, if you must, arrange for them to rent the house through a property manager and stay updated.
- Get A Good Property Manager
When first investing in property, you may try to manage all your investment properties yourself. It’s hard work and even more difficult if living abroad. A good property manager makes a valuable member of your investment team. They will protect the value of your investment and deal with all the administration and legalities on your behalf.
- Make Sure Your Home Appeals To A Good Tenant
It’s wise to understand the ideal tenant for your home while considering the size and style of your property and its’ location. Ensure your house is well maintained—this will appeal to that perfect tenant. If your home has a swimming pool and your ideal tenant is a young family with kids, ensure adequate pool safety fences are installed. If your property is somewhere hot, provide air conditioning, or if your home is most suitable to a busy single professional, ensure your kitchen includes a dishwasher.
What’s the advantage of making sure your home appeals to a good tenant? You may increase the average length of tenancy, reduce the vacancy period between tenants, and be able to charge a higher rent.
- Get A Good Tenant
If you take care of step three, then this step will speak for itself. Before selecting a tenant, ensure your property manager conducts thorough reference checks. Your property manager should also check ‘bad tenant’ databases, highlighting previous issues with previous landlords, excluding private arrangements.
- Collect A Bond
Australian tenancy laws allow you to collect a bond before the tenant moves into your property. Typically around four weeks of rent, it provides security for property damage or unpaid rent during the lease term. If you have a high-value property, you may be entitled to ask for more than four weeks bond. Each state constitutes a premium property differently. This will be based on the house’s rent, usually upwards of $1000 per week, meaning you may request six to eight weeks’ bond.
- Sign A Lease Agreement And Make Sure You Have A Property Condition Report
Lease agreements protect both the landlord and the tenant. It covers the tenant by giving them a surety that they have the right to live in the property for a minimum period at an agreed rate. It protects landlords by giving them surety that they will receive a given amount of rent for a minimum period.
A property condition report serves both parties. It serves the tenant by ensuring the landlord avoids claiming pre-existing damage against the tenant. It protects the landlord against any damage the tenant may do to the property.
A good property condition report includes a detailed written description of the property (including the conditions of all walls, curtains, carpets, and appliances) and photos of the property. A good property condition report doesn’t need to go overboard on images but shows the property’s condition and highlights any specific features or pre-existing damage.
- Undertake Regular Property Inspections
The only way you will know whether your property is being cared for is if the property manager undertakes regular inspections. We suggest every 3 or 4 months. Your property manager will be able to address any issues promptly, including breach notice and termination proceedings.
- When All Else Fails – Have Landlords Insurance As a Backup
Doing everything discussed above will reduce the risk of dodgy tenants and damage to your property. This is why taking out landlord insurance to cover the unexpected is a great idea.
As soon as you move out of your home and rent it out, you must notify your insurance company that your house has become a rental property. You may adjust your contents insurance to cover the remaining contents and take out insurance. Most insurance companies offer landlord’s insurance, with many sub-options to consider. You can also take out specific cover for any malicious damage, rent default, loss of rent (if your house becomes uninhabitable through fire or flood), or legal liabilities.
The terms of landlord insurance policies vary greatly, so make sure you read the fine print and understand the exclusions, engaging a professional to help you along the way.