Property investment can be an excellent opportunity for you if you know what you’re doing. Be aware, however, that purchasing an investment property is different from buying a property to make it your home.
Securing an investment property loan can be more challenging, and you may not always turn a profit from the investment. Home Loan Experts has several tips to help you navigate the journey of buying an investment property and profiting from it.
Tip 1: Set A Budget You Can Afford
It is usually best to put yourself in a strong financial position, with cash on hand for a deposit, before pursuing an investment loanIt would be best if you prioritised any other financial goals you might have before jumping in for an investment loan, as you may be entering a loan term of 25 or 30 years, depending on the size of the deposit you’ve saved.
Here’s a snapshot of the upfront and ongoing costs you may encounter:
- 20% deposit of the purchase price (usually)
- Lender’s Mortgage Insurance (if applicable)
- Loan application fee
- Stamp duty, mortgage registration and transfer fees
- Legal and conveyancing costs
- Building, pest and strata inspection fees
- Loan repayments and interest charges
- Repairs and maintenance costs
- Property management fees
For a clearer understanding of the costs, you can use our purchasing costs calculator.
Tip 2: Assess Your Investment Strategy
While building your investment portfolio, any property you buy needs to support your investment strategy.
Look at the property’s potential equity, how its costs or rental income will affect your ongoing cash flow and how it supports your longer-term goals; for example, suppose your strategy is to achieve a portfolio diversified geographically. In that case, purchasing multiple properties in the same area isn’t aligned with your strategy. You would need to buy in multiple places.
Some areas give stable rental returns with high rental yields, while other places offer lower yields but a higher likelihood of capital growth based on supply and demand. Holding a mixture of properties in these different areas is just one way of diversifying your portfolio.
Tip 3: Shop Around For The Right Loan
If you want to profit from your investment property, it’s essential to shop around for the loan that best suits your strategy. Each loan is different, with varying terms and conditions. So don’t just look at the interest rates.
There are hundreds of lenders and thousands of home loan products. The key to picking the right mortgage is doing your research to understand which mortgage suits your circumstances.
Access the help of a financial expert or a mortgage broker to get the best recommendation early on in the process. This will help you structure your loan correctly from the outset, leading to a solid investment plan.
Please fill in our free assessment form or call 1300 889 743 and one of our brokers will help you.
Tip 4: Research The Property Market
Find out what other properties are available in the suburbs where you’re looking. You’ll stay on top of this information better if you take the time to speak to local community members.
Contact several real-estate agents so you can compare rates. It also helps to let them know you’re looking at other properties. That will encourage them to be more open with their information. You can use websites that update information about rents, property values, demographics and other data on areas.
Ensure you’re informed by reputable sources such as CoreLogic, SQM research and government sources like the Australian Bureau of Statistics. MyBMT is also a free, helpful tool that has a property research and insights feature.
When you’re doing your research, ask yourself these questions:
- Am I making decisions logically instead of emotionally?
- What properties are on sale in the suburbs where I’m searching?
- Will these suburbs have capital growth potential now or soon?
- Are there any proposed developments nearby that could affect prices?
- Does the property need renovation? If so, do I have the extra funds for it?
- What are the average rental returns and vacancy rates in the area?
- Are there local amenities, such as schools, shops and transport nearby?
- Have I thought about who will manage the property?
Tip 5: Focus On Location
Tenant demographics are diverse in Australia, and almost every property will appeal to someone. To get the right tenants, you need a set of criteria for choosing the type of property (house, apartment or duplex) and your buy-in area (city or suburb).
For instance, if you want to rent to young professionals, a new off-plan apartment closer to the city would be better. But if you would like to rent to a family, you might want to purchase a four-bedroom house in a suburb closer to schools, parks and public transport.
Investing in real estate is ultimately about capital growth. So, the most critical decision you will make is to buy an investment property that can be expected to increase in value – at the right price.
Be aware that different types of residential property – home units, houses and land – can outperform one another over time. You need to research the areas you want to buy to discover regions that offer higher rental yields. These properties often provide lower capital growth opportunities.
Once you’ve decided on the location, you need to think about what the property has to offer. Observe the property through the eyes of a tenant; imagine what facilities you’d want if you were to live there.
Tip 6: Be Prepared To Negotiate
Negotiating for a property is one of the most crucial parts of the property purchase process for you as an investor. You need an excellent strategy. We’ve made it easier for you by listing six property negotiation tips for the property you want. These six tips can help you make a profit right away.
Tip 7: Build A Solid Property Investment Team
A property investment team is key to successful property investment. Your team could include your accountant, financial planner, property manager, real-estate agent and specialist surveyor.
Your team can advise you on the best investment strategy, property law, your rights and responsibilities and what rental income you can expect. Consulting with your group of experts will provide you with both guidance and a solid plan of attack.
Tip 8: Leverage Existing Equity
The amount of equity you have in your property is its total value minus what you owe on the home loan. You can gain equity either through capital growth or by paying down the principal of the existing loan. Then, you can leverage the equity in your current property to buy a new one.
For example: Ruby purchases an investment property for $750,000 in 2021 with a 20% deposit ($150,000) and a $600,000 mortgage. This means the property’s current equity is $150,000. Ruby can use this equity to refinance and place a deposit on a second property.
Accessing equity has financial implications, seek professional advice.
Tip 9: Find Out Whether You Want To Focus On Cash Flow Or Profit
If your cash flow is tight, then you may prefer properties with a high rental yield. If you focus on making a profit, then the emerging suburbs growing in value will have a much more significant impact than the rental yield so focus on growth areas.
There are suburbs with both high rental yields and high growth but this is the ‘unicorn’ of property investing and can be hard to find.
Tip 10: Be Mindful Of Tax Implications
Negative Gearing Can Reduce Your Income Tax
Your property is negatively geared when your costs to maintain the property are more than the rental income. In that case, you will be eligible to reduce the amount of tax you pay on your income.
For instance, say you earn rental income of $30,000 over 12 months. Suppose your net rental property expenses are $45,000. Your loss on the rental property equals $15,000 for the year, which you can deduct from your taxable income. Assuming you are in a 33% tax bracket, this reduces the tax you owe by $5000 ($15,000 x .33).
In contrast, if your property is positively geared, meaning the rent it generates is more than the cost of owning the property, you must pay tax on that rental income.
When Is Capital Gains Tax Payable?
Capital gains tax may be payable if you sell your investment property to make a profit after some time. The good news is that the costs of the property (including buying and selling costs, stamp duty, legal fees, and the real-estate agent’s commission) will be deducted when calculating the profit from the sale. If you own the property for at least 12 months, only half the profit will be subject to capital gains tax.
When you first purchase the property, keep all relevant documents so you’re able to claim everything to which you’re entitled. Also, make sure to declare all your rent-related income in your tax return each year. You’ll need to keep records of the date and costs of buying the property for capital-gains-tax purposes. Remember that keeping these records will help ensure you don’t pay more tax than you owe.
How Can I Get Potential Tax Deductions?
You will be able to claim a tax deduction on various expenses related to your investment property when it’s rented out or available for rent.
These are included but not limited to:
- Advertising costs
- Property management fees
- Borrowing expenses, including loan interest charges
- Council rates, land tax and strata fees
- Building depreciation
- Repairs and maintenance
- Cleaning and gardening costs
- Building and landlord insurance
- Accounting and bookkeeping fees
Check ato.gov.au for more information on tax deductions you can claim.
How To Apply For An Investment Home Loan
If you’re looking for an investment home loan, you’ve come to the right place! We have expert mortgage brokers who can assist you with the home-buying process. Please call us at 1300 889 743 or complete a free online assessment form.