Establishing your budget and an investment strategy is key.
Australia’s property market is booming, with low-interest rates making buying an investment property easier than ever. However, many people get swept away by the allure of rental income and capital gains, forgetting about the risks involved with taking out a new home loan. With that in mind, we’ve put together this guide to buying an investment property, taking you through everything you need to know.
Pros of acquiring an investment property
- An investment property is a long-term, secure investment that is more stable than other investment options
- They generate fixed returns, so you know how much you’ll be receiving in your bank account each month
- If you have a property where the rental income is greater than your loan repayments, you won’t need to invest any additional funds
- As investment property allows you to generate income, there are a number of tax deductions available
- They are a good way to diversify your investment portfolio
- You can increase your portfolio by building and leveraging equity in your investment property to contribute towards additional properties
Cons of acquiring an investment property
- It’s often hard to save up enough money to buy an additional property, especially if you’re still paying off an existing mortgage
- While property is a secure investment, it can sometimes be hard to sell quickly; making it a non-liquid asset
- Buying a property does not guarantee tenants, and you may have to spend time and money getting the house up to scratch
- On the other end of the scale, your rental income may be lower than your mortgage repayments meaning you must continually invest money
- House prices and property value are not guaranteed to increase and you need to be wary of a potential decline in the market
Can I afford an investment property?
After completing your own self-assessment, it’s important to seek professional advice. It may seem that you’re ready and can afford to purchase another property, however, many people find themselves over-extended and unable to afford the repayments on their new property later down the track.
At the bare minimum, speak to an accountant who can prepare a cash-flow analysis to see if you can afford to take on investment. If you want to take greater precaution, solicitors, conveyancers, and financial planners can all provide sound advice as to whether you are ready to purchase another property.
You should also consult your lender to get a rough idea of how much you can borrow. You could also try using Joust, as we carry no contractual obligations and can be used as a research tool to see the different amounts and terms that brokers are willing to offer you.
Once you have found a home loan that seems right for you, securing pre-approval can give you a set price range to shop around with. This amount should be in line with what you and your accountant have previously established using the cash-flow analysis.
Should I have a property investment strategy?
Having a solid property investment strategy in place will ensure you’re making the right decision for your needs. There are a number of different ways an investment property can add ‘value’ to your financial state, and this will directly impact the type of property you purchase and the size of your home loan:
- Buy and hold: This strategy is the traditional method of purchasing a property and generating rental income to pay off your mortgage. With a long-term goal of leveraging capital growth.
- Renovating or flipping: This strategy involves making alterations to the existing structure to either attract a higher rental income or sell the property for a profit.
Other strategies include buying an investment property for negative gearing, positive gearing, passive property development and active property development.
Once you’ve established your property investment strategy you should do your market research. Corelogic and Residex offer free suburb profiles that include metrics such as days on market (DOM), rental yield, price growth and vacancy rates. Areas with greater rental yield and lower vacancy rates will suit the buy and hold strategy. Whereas price growth and DOM are a better indicator as to the success of a renovation or flipping strategy.
You’ll also need to consider the property type you invest in, as each carries its own pros and cons and should be considered in line with your investment strategy.
What are the final steps?
Having completed all the steps outlined, there are a few final things you should do to get moving:
- Speak to your broker: Get your home loan documentation prepared early so you can snap up a great investment when you find it
- Hire a surveyor: This can help maximise your tax deduction
- Have the property appraised independently: A professional inspection before the purchase can save you thousands down the track
Ready to find the best home loan rate for your investment property? See how Joust can help here.