Last Updated: 24th August, 2022

Many first home buyers choose to invest in property before buying their first home. This is because of the many benefits it offers.

By releasing equity, you can even invest in shares, bonds or a business. Property investment can help you quickly build your investment portfolio.

However, investing in property without careful consideration can result in heavy losses. Find out why people invest in property and how you can too.

Is it a good idea to invest in property?

Property investment can potentially produce greater returns than other investment options. However, that’s only if you know what you’re doing.

There are many benefits of investing in property. The main reasons why people invest in real estate include:

  • Return on investment: You can get constant returns through rental yields of investment properties. If these returns are higher than the mortgage repayments, the property will be paying off the mortgage itself. Investors, especially first time investors, can benefit significantly from this. If you’re looking for high returns of up to 12%, you might want to consider investing in Special Disability Accommodation (SDA) that is offered by the National Disability Insurance Scheme (NDIS).
  • Security: You’re more secure with a relatively fixed return if you invest in property. The stock market has a higher risk in comparison. Also, market volatility is reduced because of the relatively long amount of time it takes to liquidate a property asset.
  • Tax benefits: Property investment can provide various tax benefits. If your interest and other costs are more than your investment income, you can take advantage of negative gearing benefits. You can claim a tax deduction for depreciation in value of your investment property. Also, you can apply for a Tax Withholding Variation through the Australian Taxation Office (ATO). This will allow you to receive tax break each time you receive your salary instead of waiting 12 months. By saving on tax, you can use the money to invest in property all over again.
  • Growth: The property growth rate in Australia has been steadily increasing. If you buy in a good location, the value of your investment property can rise substantially. You can enjoy capital growth even after your retirement. The property can also be a great gift to your children or your grandchildren.
  • Getting finance: Mortgages for properties form a major part of any lender’s loan products. It’s relatively easy to secure finance to invest in property. There are many investment loan options for commercial properties as well. After you have a property under your belt, it can help you secure additional finance. You can use existing equity to secure other loans and buy even more property.

What are the risks of investing in property?

If you’re planning to invest in property, you’ll need to prepare accordingly. First time investors need to be twice as careful. Property investment can be a bad choice if you don’t know what you’re doing.

The main risks of investing in property include:

  • Costs: The overall costs to invest in property can be quite high. This is because of expensive entry and exit costs such as stamp duty and legal fees. There are also ongoing costs involved such as maintenance costs, levies and interest. Make sure you can meet these costs before investing in property.
  • Bad liquidity: Unlike shares, property saleability can vary a lot. Depending on the property type, location, zoning and condition, it may take a long time to sell. This can be an issue at times of financial crisis.
  • Rental income not guaranteed: Unless you’re investing in Defence Housing Australia (DHA) properties, rental income isn’t usually guaranteed. This can be even more so for a commercial property once a long-term lease expires.
  • Risk from change in infrastructure: Major infrastructure changes in or around the area of your investment property can attract tenants. However, it can drive them away if your property is older. Damaged infrastructure can also decrease the value of the property.
  • Property value can drop: Residential property values change progressively over a long time period. However, commercial property values can drop quickly. Their values can drop if the property becomes vacant or if the lease is about to expire. Property prices fluctuate. Your investment property may decline in value right when you’re planning on selling it. This needs to be taken into consideration before investing in property.

Many first time investors may buy or invest in property out of fear of missing out. This can result in heavy losses instead. Please invest in property only after speaking with a professional finance advisor or other investors.

If you want to learn more about investing in property, you can check out our property investor centre.

The right amount of research

Doing too little research is likely to lead to an underperforming property. Even worse, it can lead to a money-losing investment. This is because even if a location or property may seem good on the surface, it may not truly be so.

You can research online or visit the property yourself to find out if it’s a good investment. It’s recommended that you try to verify your research and stats.

On the other hand, doing too much research may stress you out. When you over-analyse things, you may not be able to take action. You can also lose out on the property if you spend too much time researching.

A great way to research just the right amount is to have a structured approach. Create a research checklist and follow it through before making a decision.

Also note that investors that sit on their research tend to lose out on good opportunities.

Where to invest in property

Familiarise yourself with the area and property market before you invest. If you’re planning on investing somewhere new, think twice before you make a decision.

You can look for areas with high growth projections and rental income. Reports and stats for this can be found online.

Recent sale prices can help you get a price estimate. It’s also a good idea to check out the vacancy rates in the area. More vacancies mean higher difficulty to sell the property.

What type of investment property should I look out for?

First time investors can look for properties that appeal to a wide range of people. Specialised properties such as petrol stations can be quite tricky. However, more experienced or professional investors can use their knowledge to invest in them.

Check out for properties with low maintenance costs. Inner city units can have lower maintenance costs than normal houses. However, your profitability depends hugely on your research.

Associated costs of property investment

The main costs you’ll need to pay when you invest in property includes:

  • Valuation fee: The property will need to be valued and it can be expensive. You may even need to pay for property inspections and strata reports if they are needed.
  • Purchase stamp duty: The stamp duty on an investment property can be as high as 6% of the property value. Please note though that this varies between states and territories.
  • Legal fees and conveyancing costs: These costs are payable when you invest in property. However, they can be waived for investors in some cases.
  • Transfer fee: You’ll need to pay a government fee to register your name on the property title. This will remove the vendor’s name and official transfer ownership of the property.
  • Loan fees: If you apply for finance, you may have to pay an application or settlement fee. Some lenders may not charge these while others can charge you as high as $900.
  • Lenders Mortgage Insurance (LMI): Generally, LMI is payable when you’re borrowing over 80% of the value of the investment property.

You can check out our property purchase costs calculator to get an estimate of these costs.

What about the ongoing costs of investing in property?

If you invest in property, you should watch out for these ongoing costs:

  • Rates and levies: You may need to pay council rates such as the water bill if you buy and let out a residential property. If you invest in a strata title or apartment, you may have to pay levies to the corporate body that maintains the building.
  • Maintenance costs: This includes all costs associated with repairs and maintenance of the property. Note that these costs are tax deductible. However, improvements to the property such as paint jobs or new fittings won’t receive tax benefits.
  • Insurance and agent fees: This includes costs of insuring the property as well as fixtures and other contents. If you have an agent, you’ll need to pay them as well.
  • Interest: Principal and interest must be paid if you didn’t buy the property with cash. However, a positively geared property will pay this off itself.

What finance options are available?

There are many lenders that offer different investment loans. You’ll need to find one that suits your specific investment goals and risk profile.

If you’re planning on applying for an investment loan, make sure you can meet basic lending criteria:

  • Genuine savings: Most lenders may want you to have at least 5% in genuine savings. This basically means you need to have saved or accumulated a deposit in a bank account for at least 3 months.
  • Equity: Lenders may want to see equity in other properties if you’re borrowing over 90% LVR.
  • Credit history: Lenders prefer a clean credit history with an above average credit rating.
  • Employment and income: You’ll need to prove that you can afford the mortgage. This can usually done by showing that you’ve got stable employment and a strong income.

It’s a good idea to get pre-approved before even starting to look for an investment property. This is because it can give you a good idea of whether or not you can qualify for finance. Also, a reliable pre-approval can help you get an investment loan more easily.

Our mortgage brokers have many years of experience and know which banks can approve your loan. We know which lenders offer reliable pre-approvals and can help you create a strong application.

You can call us on 1300 889 743 or complete our free online assessment form to speak with one of our credit specialists.

How much can I borrow?

Depending on the strength of your loan application, you may be able to borrow up to:

  • 80% LVR: If you borrow 80% of the property value, LMI won’t be applicable. However, if you’re taking out a low doc investment loan, LMI will be applicable at 60% of value of the investment property.
  • 85% LVR: With a strong income and stable employment, you can take out an 85% investment loan. You’ll also need to have a 15% deposit with at least 5% in genuine savings.
  • 90% LVR: Some banks may be able to let you borrow this amount. You’ll need a big deposit, clean credit history and a standard investment property. Please note that you’ll need to build a strong case with the lender.
  • Over 90% LVR: Only a select few lenders offer 95% investment loans. This amount can also be borrowed through property investor trust loans. You’ll need a large deposit, perfect credit history and a good investment portfolio. The investment property must also be a standard property that can be sold easily. However, qualifying for this can be quite difficult.

Where can I find investment loan rates?

Investors can have a hard time looking for investment loan interest rates. This is because lenders don’t usually advertise their best interest rates.

However, we’ve published the best rates from our panel of almost 40 lenders so it’s easier for you to shop around.

You can check out these rates on the investment loan rates page.

Can I get a no deposit investment loan?

It’s possible to get a no deposit investment loan. However, it’s not nearly as simple as it used to be.

You may be able to borrow up to 105% without a deposit if you have a guarantor. Another way to borrow with a low deposit is using equity from your existing investment properties.

Currently, these are the only ways you can get approved for an investment loan without a deposit.

Status of investment loans in Australia

The Australian Prudential Regulation Authority (APRA) is worried about a potential market crash. It assumes the huge growth of property prices in the past few years is due to crazy property investor activity.

As a result, APRA has introduced new regulations for investment loans. Basically, lenders have to tone down the number of investment loans as well as loan amounts.

The interest rates on investment loans have increased and larger deposits are needed. Some banks now lend only 80% LVR for investment purposes.

There have been a lot of changes taking place. First time investors can have a tough time deciding what to do. This is where a specialist mortgage broker comes in.

Our mortgage brokers specialise in investment loans. They know which banks can offer you a better deal and then help you get approved with them.

You can speak with one of our brokers by calling us on 1300 889 743. If you’d like one of us to contact you instead, you can fill in our free online assessment form.

Invest in property FAQs

How can I get started in property investment?

You can get started in property investment through these four steps:

  • Before you invest in property: Assess the risk you’ll be taking and speak with a mortgage broker before you decide to invest in property. It’s also a good idea to speak with a property-focused accountant. Make sure you’re financially ready to invest. Determine what you want out of your investment and only then follow through to the next step.
  • Get pre-approval: Investors often miss out on a great opportunity because of the delay in finance. By getting reliably pre-approved, it can be easier to get an investment loan later on. It also allows you to gauge your capacity to borrow.
  • Search for an investment property: Start researching and look for an investment property that can meet your goals. You can also start budgeting and create a purchase plan. Once you’ve found a suitable property, research the property and validate your findings if possible.
  • Secure finance: After you find a suitable investment property, you can apply for an investment loan. Apply for a mortgage that can help you meet your finance goals. A mortgage broker can help you find the right lender and get the deal you want.

Please note that the above steps are simply basic guidelines. Speak with a mortgage broker or a financial advisor before you decide on investing in property.

After you’ve purchased an investment property, make sure you manage it and keep good records. Prepare your documents for tax beforehand and you’re likely to have a great start in property investment.

What costs are subject to capital gains tax?

Capital Gains Tax (CGT) is applicable when you make a capital gain. This means you’ll need to pay CGT if you sell the property for more than what you paid for it.

The main costs subject to CGT include:

  • Incidental costs: This includes legal fees, stamp duty, agent fees as well as advertising and marketing fees.
  • Ownership costs: This includes tax rates, land tax, interest on your mortgage and maintenance costs. Please note that only properties acquired after 20 August 1991 are eligible to offset these costs.
  • Improvement costs: This includes improvements made to the investment property such as adding a granny flat.
  • Title costs: This includes the legal fees associated with keeping your title on the property.

You can check out the 5 Things About CGT blog post to learn more.

Should I focus on rental income or capital growth?

Capital growth is usually the long-term strategy that many investors focus on. However, rental income can help you get a steady cash flow. You can use this income to pay off the mortgage and save to invest in another property.

You can use the investment property cashflow calculator to get an estimate on the weekly cash flow position of your next investment property.

Ultimately, you’ll want to sell your investment property at an attractive price. It will usually take many years to see significant increases in value. However, proper research and investing in the right property at the right time can help you make larger gains in short time.

Your focus should primarily depend on your investment goals. For example, if you’re planning on building your investment portfolio, you can focus on rental income. The cash flow can help you invest in more properties.

If you already have a few properties under your belt though, you can focus on capital growth.

Please note that the above should not be taken as financial advice. It’s simply an example based on a particular scenario and it may not be a suitable option for you. Speak with a financial advisor to get a better understanding for your personal situation.

If you want to learn more, you can check out the rental income or capital growth page.