Investing In Property | Property Investment Guide

How To Start Investing In Property

Before you begin your journey, you should know why you are investing in property. Ask these questions when you’re thinking about what you want to achieve buying an investment property:

  • Do I plan to keep the property for a long time?
  • Am I looking for a quick profit?
  • Do I have equity?
  • Can I qualify for an investment loan?
  • Do I have enough saved to buy an investment property?
  • Is the renovation worth it?
  • What does the ideal tenant look for in a property?

After you’ve decided why you’re investing in property, it’s time to choose the right strategy to help you achieve your goal.


What Are The Different Property Investment Strategies?

The two most common categories of property investment strategies are capital growth and rental yield.

Rental Yield Strategies

A rental yield strategy involves taking in rental income that exceeds the cost of owning the property. The rental yield is the annual rental income expressed as a percentage of the property’s value; the higher the yield, the better for the owner. Properties with good rental yields are usually affordable and have low entry costs (meaning stamp duty is lower, and you can buy with a smaller deposit). There is high tenant demand for these properties and limited supply.

Capital Growth Strategies

In a capital growth strategy, you seek to maximise the return on a property as it appreciates in value. You buy the property at a competitive price and wait for it to increase in value over the long term. Growing demand and limited supply increase a property’s value, You pick the right time to sell to earn a profit.

There are different ways you can achieve a high rental yield, capital growth or even a mix of both.

  • Rentvesting – buying an investment property while renting the home in which you live
  • Buying and holding the property for a long time to earn rental income
  • Buying a property and selling it for capital gain
  • Buying and renovating (either to hold or sell)
  • Buying a commercial property
  • Buying off the plan

The right investment strategy depends on your goals and financial situation. That’s why it’s important to know how your finances are doing when you invest in property.


How Much Money Do I Need To Invest In Property?

Usually, you need a deposit of at least 20% of a property’s value to invest in real estate in Australia. So if you’re buying a $1 million property, you will need $200,000.

You can buy property with a deposit that is less than 20% of the property value but you will have to pay Lenders Mortgage Insurance (LMI). However, there are circumstances where you can borrow more than 80% and still get waived LMI.

Can I Qualify For An Investment Loan?

Lenders consider investment loans a higher risk than owner-occupier home loans, so you have to be in a particularly strong financial position.

Lenders will look at:

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Debt-To-Income (DTI) Ratio is becoming more important for property investors. Basically if you have a lot of debt, then DTI tends to be high (basically you are very negatively geared) and major banks will no longer approve your loan. Fortunately, there are other lenders are available as long as you can afford it.

Before you start saving for your investment property, figure out your expenses, income and total assets. This gives you a rough idea of how much you can invest. Get pre-approved for an investment loan to get an even more clear picture of how much you can borrow. Pre-approval lets you know how much a bank is willing to lend, and you can start to look for properties in that price range.

How Much Can I Borrow For An Investment Property?

100% with a guarantor: If you have parents who own property in Australia, you can borrow 100% of the property value. You do not need to pay LMI if you have a guarantor on your investment loan.

95% investment loan: Some lenders can go up to 95% LVR, but the lending criteria can be strict. They require a clean credit history and a good investment portfolio.

90% investment loan: You need to build a strong case with the lender and show that you have a clean credit history and are buying a standard investment property.

85% investment loan: If you have strong income and employment and have at least a 15% deposit saved, you can get approved for an 85% investment loan.

Overall 90% is a ‘sweet spot’ for people who want to grow their portfolio aggressively. The loans are fairly priced and the deposit size is small. Going to 95% means it gets quite expensive. Going to 80% means you can’t buy as many properties as you need more in savings.

If you have concerns about whether you qualify for an investment loan, talk to a mortgage broker at Home Loan Experts. We will help you assess your situation and find an investment loan that suits your needs.


How To Choose An Investment Loan

Look at the five key areas when choosing your investment loan:

Interest rates

While going for the lowest interest rate may be your first instinct, it doesn’t always get you the best deal. Also, keep in mind that low introductory rates (honeymoon rates) will revert to a higher variable rate after the promotional period ends.

A variable interest rate changes if the lender increases or decreases its lending rates. It is usually low throughout the life of the loan, so it can be used to maximise your cash flow.

In contrast, the interest rate on a fixed-rate investment home loan remains the same for a specific period. Even if the lender increases or decreases its lending rates, your rate does not change. If you anticipate that your fixed rates will remain lower than most variable rates for some time, this is a good option. One big concern with a fixed interest rate is paying break fees if you want to refinance during the fixed period.

Type Of Repayment: Interest And Principal Or Interest-only

When you take out an investment loan, you must pay back the principal and interest. Some loans have an interest-only repayment period, during which you do not pay back the principal, only the interest charged.

For property investors, an interest-only repayment period has many benefits:

  • Repayments during this period are lower. This can help you manage your cash flow. You can use the additional funds to build your property portfolio.
  • You can maximise your tax-deductible expenses with interest-only loans, as the interest paid on an investment loan is tax-deductible.
  • You can adjust your finances and expenses during the first few years of your investment journey.
  • You can put your extra funds towards paying off your home or saving for more investment properties.

Remember, however, you’re not building any equity during the interest-only period, as you’re not paying down the principal.

Read more about interest-only loans and which option fits your investment strategy.

Loan Term

Most investment loans have a term of between 25 and 30 years. However, some lenders go up to 40 years. The right length of your investment loan depends on your purchase price, ability to repay and monthly budget.

Besides the loan term, it’s essential to have the flexibility to make larger repayments during the life of the loan. You do not want to have penalties for paying off your investment loan sooner.

Extra Features For Investment Loans

The features available on investment loans and owner-occupier loans are similar. Let’s take a look at how these features can help a property investor.

Offset account: An offset account is a transaction account linked to your loan. The primary benefit of an offset is that the balance in the account is deducted from the principal when calculating interest charges. You can use the money in your offset account to save funds for your next investment property.

Redraw facility: While a redraw is not a separate account, it allows you to access any payments you’ve made on your investment loan above the minimum. The extra repayments reduce the amount of interest you pay.

Line of credit: As the name suggests, it works like a credit card. You can borrow extra money, which is secured against the equity in your investment property. You pay interest only on the amount used. The credit can be used for renovations or as a deposit on your next investment property.

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Mortgage Broker Tip: Each redraw is seen as a new loan by the ATO. So it’s best to put funds in offset against your investment loan rather than to put them in the loan account itself. Otherwise you risk losing some of the tax deductions. Ideally though your funds should be offset against your home loan and only offset an investment loan once you’ve paid off your home

What Fees Do I Pay For An Investment Loan?

  • Mortgage establishment fees can include loan set-up fees, application fees, valuation fees and settlement fees.
  • Mortgage registration fee is paid to the state or territory, which will register the investment loan so future potential buyers can see that there is an existing mortgage on the property.

How Much Does It Cost To Invest In Real Estate?

There are certain upfront and ongoing costs associated with buying and owning an investment property. Upfront costs include:

  • The deposit
  • Stamp duty, which varies depending on state and purchase price
  • Connection fees to activate utilities and services
  • LMI

Please note that some lenders let you capitalise LMI to the loan amount or pay it monthly. If you choose these options, LMI becomes an ongoing cost.

Ongoing costs of owning an investment property include:

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