Investment properties have many benefits when it comes to building long-term wealth, but this wealth is not always guaranteed. As a means of diversifying your exposure to different asset classes, property can be less volatile than shares (although not always) and tends to be the haven investors rush to when other assets suffer. While it has lost its gloss since the boom times of the late 1980s, sensible investments in property have many attractions.

 
All investments need a benchmark to measure performance against. Residential property isn't any different, yet few investors monitor their returns. Your first investment in property doesn't always have to be something you live in. Indeed, buying a small apartment to rent out can be a good way to accumulate a big enough nest egg so you can eventually buy your own place.

Generally, investing in real estate gives you access to two benefits:
1.Capital growth 
2 The  tax advantages associated with negative gearing. 

What is meant by  capital growth? Capital growth is the money you make as the value of your property appreciates. 

 What is negative gearing? Gearing basically means borrowing to invest . An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared as you are able to deduct the costs of owning an investment property from your overall income. The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs.

Because negative gearing deductions offset your income, they are most beneficial to high-income earners. What this means is the more you borrow, the more interest you pay and the bigger your deduction. While everyone wants a large tax deduction, you shouldn't over commit yourself in order to get one. You still have to make the mortgage payments and those lucrative tax benefits don't arrive until the end of the financial year. In periods of low inflation, the benefits of negative gearing are usually negligible.

Where and what to buy.

Learn how to maximize capital growth and negative gearing. Read on for additional handy tips.

Where to buy.

Because investment properties are bought as investments and not as owner-occupied residences, purchasers are able to take the emotion out of the decision of where and what to buy.

As you want to benefit from as much capital growth as possible, the first rule is to buy in a growth area.   The best strategy is to visit a number of areas to get a feel for what they offer. As you will be renting out the property be aware of what tenants look for when they rent such as access to transport, shops and leisure facilities. An attractive property in a sought-after area will also ensure strong rental returns and ongoing tenancy.

What to buy

While owning a house may be nice, units are far easier to rent out. They are also easier to maintain there's no lawn to mow, and when things go wrong in the building such as flooded pipes, any expense is shared among the other owners.

Properties with a view are always more desirable than those without, but the bottom line should be what you can afford to buy and what rent you expect to be able to charge. Over-committing in order to get a waterfront property is not a sensible move if there aren't any tenants around that can afford to rent it from you.

Zoning is another factor that can affect what you pay and what you get when you sell. homes on land zoned for single-family dwellings are popular as this protects your investment from developments that might undercut its value.

Look for a property that can be sold quickly if you find you have to sell in a hurry. Again look for additional features that are attractive to buyers such as an apartment with a balcony, internal laundry and garage.

If the property you are interested in is currently being rented, ask about its history of tenancy. Have there been periods where it hasn't been occupied? If so, find out why as past problems of getting tenants may mean you could also inherit them.

Home loans for investment properties.  There are few differences between what you need to do to borrow for a property you'll live in and borrowing for one you'll rent out. Some lenders charge a higher interest rate for investment properties because they say their risk is higher, but if you shop around you can generally get a rate that is the same as for owner-occupied properties.

When buying an investment property ensure you do everything you would do if you were purchasing a home you would be living in. This includes all the normal inspections and familiarizing yourself with property prices in the area. The last thing you want to do is overpay on a property and not see any capital gain.

 Renting out your property

What you'll learn in this step: Convenience is the key with property rental and liability insurance can give you peace of mind.

Tenants for rent

Investment properties are generally rented out unless you're in the enviable position of not needing the rental income so when calculating what you can afford to buy, you will need to factor in contingencies for the property being empty for short periods, whether for repairs or for finding new tenants.

Rental income helps generate the cash flow to pay the mortgage but don't forget to include this income when you file your tax return as this money will count towards your total income for the year.

Making your investment pay

If you hold your investment property for long enough, you will hopefully each the stage where your losses are turning into gains. This occurs for two reasons. First, the rent you are charging will probably rise as it keeps pace with the market value for rents. Second, you and your tenants are steadily whittling the mortgage away and once your rental income exceeds your mortgage repayments you are no longer negatively geared. You may instead be neutrally-geared or positively-geared.

From an accounting point of view, no negative gearing means no tax advantages. But that doesn't necessarily mean you should rush out and sell it. Yes,  you'll have to pay more tax because the income you're making is more than your losses but the fact is you are making money - which is why you invested in the first place.

Seek advice from a tax agent or financial planner before leaping to sell a positively-geared property investment. The temptation is to reap your profits and plough them into another property – and this is a perfectly reasonable strategy – but don't lose track of the costs involved in doing that. Stamp duty alone can be a prohibitive disincentive.

Do you DIY or choose a property manager?

While it is possible to manage a rental property yourself and in doing so you can save the cost of a management fee (usually around 5 per cent), it can be time-consuming and it's hard to remain emotionally-detached if you have tenants ringing up complaining about every little thing. The other option is to get a professional property manager to manage it for you. Employing a property manager has many advantages apart from the time saving and convenience factors they offer. As they manage so many properties they will have also access to a large number of reputable trades people with whom they may have negotiated cheaper service fees.

They can also deal with the time consuming tasks of vetting potential tenants and checking their credit worthiness. As they deal with tenants and rentals every day, property managers have up-to-date information on what the market is like and what tenants are prepared to pay. They may also have access to tenants who they can recommend for your property. And don't forget their fees are tax deductible.

Insurance

While it is up to your tenants to take out their own contents insurance,you will need to have building insurance. You may also want to consider liability insurance to protect yourself in case your tenants damage the property or themselves.

Know the tax implications

What you'll learn in this step: Ensure you are up to date with changes to taxation law that may affect your investment property. Capital gains tax

Capital Gains Tax (CGT) is the tax charged on any capital gains that arise from the sale or disposal of any asset bought or acquired after 19 September, 1985. You are liable for CGT if your capital gains exceed your capital losses in any income year. Any capital gain must be shown in your income tax return for that year. While you do not pay capital gains tax on your place of residence, investment properties are subject to the tax when sold. 

Get your tax refund early

Variations are commonly sought by investors who have undertaken a negative gearing program and who want to use the extra cash in their pay packet to help fund their interest expenses.

So if you can reliably estimate your income and expenses for this year, you can have less tax deducted from your pay now in lieu of getting a refund at the end of the financial year. It's not quite the same as getting a check for next year's refund now but it's close.

For example, if you have an annual gross income from your employer of $45,000, but estimate you'll make a $15,000 loss on an investment property, you can apply to have your tax payments calculated on an income of $30,000. That could cut your weekly tax payments by about $85.