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:
- Whether you have at least 5% to 10% in genuine savings
- Your Loan-to-Value Ratio (LVR)
- Your credit history
- Your credit score
- Your employment
- Your borrowing power
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
- Type of repayment – interest and principal or interest-only
- Loan term
- Extra features
- Fees and other costs of investing in real estate
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.
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.
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
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:
- Building and landlord insurance (or other insurance) for unforeseen situations like fires, floods, thefts, tenants refusing to pay, etc.; premiums are usually paid annually.
- The weekly, monthly or fortnightly repayments on your investment loan.
- Property management fees if you hired a property manager
- Repairs and maintenance fees
- Fees for water and sewage, or anything that does not have separate metering
- Look at suburbs that will help you achieve your property investment goals. Your strategy will determine where you should look to buy.
- Take note of emerging suburbs or those that are experiencing a ripple effect. A ripple effect happens when the capital growth of one suburb spills over into its neighbouring suburbs.
- Supply and demand should play a crucial role in choosing a location. Do not invest in areas where there is an oversupply of properties, as you will not get the right price or the right tenant for them.
- Be sure to obtain a suburb report and property report to get data on vacancy rates, rental yields, comparable and recent sales, types of properties and more.
- From property and suburb reports, you will learn the types of property in demand, whether people are looking for apartments or houses, the number of bedrooms, desirable features such as proximity to school, work, public transport and more.
- You’re looking for capital growth more than rental yield
- You have more freedom to make changes to it (renovations or even adding a granny flat)
- You can make a deposit and manage the maintenance fees of owning a house
- You’re not reliant on rental income to service your investment loan
- You’re looking for rental yield over capital growth
- You understand the fees associated with owning an apartment
- You do not want high maintenance fees
- Your apartment has the features tenants desire
- You want to avoid renovation projects
- There is more tenant appeal, as they usually have more features to attract the right tenant. Tenants are willing to pay a higher rent for amenities.
- You enjoy depreciation tax benefits longer, which helps with monthly cash flow.
- If repairs are required, builder’s insurance will cover the costs.
- New properties tend to get lower capital growth as they are sold at a premium.
- When you sell a property the depreciation is factored in when calculating capital gains tax. The high depreciation of a new property is a positive for ongoing cashflow and a negative for capital gains when you sell.
- There are fewer price fluctuations, so you get a more accurate valuation of the property.
- They are located in well-established suburbs that have enjoyed consistent growth.
- You can add value to the property through renovations.
- By the time construction is complete, the value of the property might have dropped.
- Some suburbs tend to have an oversupply of off-the-plan units.
- Developments are heavily marketed to attract investors and home buyers. The cost of advertising will roll over into the price you pay.
- Things may not go according to plan, so there could be construction delays. The worst-case scenario is the developer going bust before construction is complete.
- Building inspection to check for structural integrity and soundness
- Pest inspection to examine the property for any termite or pest damage
- Strata inspection is applicable only if you’re investing in townhouses or strata units; this inspection covers who the current owners are, your voting rights, the current value of the building, building insurance, etc.
- A solicitor provides you with extensive legal advice. There’s more to buying a property than signing a few documents. A solicitor will look over any sale or offer documents for caveats or easements.
- A mortgage broker helps you get approved for the right investment loan. Besides getting you the right loan, a mortgage broker looks through your finances to present you as an ideal borrower and wades through the paperwork and documents required to get approved.
- An accountant advises you on the right property structure for maximum tax benefits.
- A building inspector provides you reports on the property’s structural integrity to ensure it is in top condition before you buy it.
- A real-estate agent helps you buy (and sell) properties.
- A buyer’s agent helps you find and purchase an investment property that meets your goals.
- A property manager will find you the ideal tenant.
- Get the best deal on your investment loan at competitive interest rates
- Find out how much you can borrow and afford
- Get the true costs of getting an investment loan, from loan charges to LMI
- Organise your documents and submit them for the loan application
- Get valuation reports for your investment properties
Before you start your property search, make sure to budget for these upfront and ongoing costs. When budgeting, keep in mind whether each expense is due monthly or annually.
What To Look For In An Investment Property
After you’re pre-approved for an investment loan and know how much you can afford, it’s time to do a property search. Before you look at properties, the first thing you have to choose is the location.
Finding the right location is crucial to the success of your investment strategy. So how do you find the right one?
After you’ve narrowed down your list of suburbs, it’s time to decide on the type of property you want to buy.
Houses Vs Apartments
Are apartments a good investment? Houses have more consistent growth over the long term, especially in established areas. It’s also easier to get financing to buy a house than an apartment. However, investing in an apartment can bring good returns, and in most circumstances it’s more affordable than buying a house.
Why should I invest in houses?
Why should I invest in apartments?
New Property Vs Established
New properties appeal to passive investors who are time poor and want lower maintenance fees. However, established properties typically have a more accurate estimated market value and consistent growth.
Why should I invest in new properties?
Why property investors favour established properties?
Established or old properties outperform new because:
Why should I invest in established properties?
Is buying off-the-plan a good investment?
Off-the-plan properties are brand new, so you enjoy higher depreciation benefits. You also pay a lower stamp duty, since the property is not fully complete yet. Some off-the-plan developments might be cheaper than established properties.
Since you need to pay only a certain percentage of the deposit, you have until settlement to save the rest.
Several factors make off-the-plan properties risky investments:
Off-the-plan is risky and is best avoided unless people are in a very strong financial position. It works well for investors if they buy off-the-plan at the bottom of the market. They can negotiate hard and get a good deal and then by the time they settle they have equity as the price has risen. However, this is speculative, so investors shouldn’t rely on this. It could turn out there is no growth or a fall in prices before settlement.
It’s best to read the fine print before you opt to buy off the plan. Get the help of a solicitor or conveyancer before you sign any contracts.
Once you have a shortlist of properties that align with your investment strategy, it’s time to inspect the properties before you make the offer to buy.
How To Inspect An Investment Property
A property inspection is crucial before buying because you do not want repairs for termite damages or leaking pipes to add to the costs of buying. You are looking for properties that have great appeal to the general public, requires low maintenance, are below their potential so it only requires cosmetic renovations or there’s an opportunity to build a granny flat.
Get the help of qualified and experienced inspectors for these pre-settlement inspections:
Even before the official inspections, when you’re looking at property, watch for superficial clues and ask questions. For example, if you notice a new coat of paint in a room, ask why it was recently painted. The seller could be hiding mildew and cracks on the walls.
Once you’re satisfied with the property inspection reports, you’re finally ready to make an offer.
How To Make An Offer On An Investment Property
Before you make the offer to buy, you have to know the property’s value and then negotiate to get the best price for your investment property. Use comparable sales or a buyer’s agent to determine how much to offer.
Talk to your solicitor or conveyancer before negotiating and signing the contract of sale. They will take care of checking property titles and the clauses of the contract.
Once you’ve signed the contract, you pay the deposit to the seller and the property is officially transferred into your name.
Congratulations, you now own an investment property. However, your journey as an investor is not over. You’ll start making repayments on your investment loan and, depending on your chosen strategy, you may now be faced with arranging renovations or finding tenants.
Get Your Investment Team
As you can see, investing in property in Australia can be an arduous process if you don’t have the right people to help you. It’s a mistake to start looking for investment properties before you assemble your team of professionals. Here’s who you should have on your investment team:
Mortgage Broker Tip: The quality of property managers varies significantly. You want to find someone proactive and professional. It’s better to pay a little more for someone who does a great job rather than someone who doesn’t screen tenants properly or check on the property regularly.
At Home Loan Experts, our mortgage brokers are seasoned property investors. We will answer all your questions about investing in property and also help you:
A good mortgage broker gets you a competitive loan. However a great mortgage broker understands your investment objectives and underlying needs. They’re your partner that enables you to get there. It’s about much more than the loan itself.
We’re here to help. Call us on 1300 889 743 or enquire online today.