All your Investment Property FAQ's Answered

Thinking of getting an investment property? Learn all the answers to your investment property questions today.

Article published 15 September 2021

Buying Investment Property in Australia

Deciding where to buy your investment property in Australia can be overwhelming. It helps to make an educated decision and understand the area you are looking to invest in. You can read a detailed guide on investing in the major states and cities in Australia here to begin your investment journey. 

According to the ATO, in 2018-19 there were over 2.2 million Australians who owned an investment property.1

First Time Investment Property

The following steps involve a rough guide to get you prepared on how to buy an investment property: 

  1. Establish goals and create a plan
  2. Have a deposit ready - if you don’t have a 20% deposit, you may be able to look at using any existing home equity or possibly a guarantor
  3. Calculate one time and ongoing costs
  4. Speak with a Mortgage broker and apply for your investment home loan. 

When buying an investment property, it is best to be strategic and look for a property that appeals to a wide range of tenants. It is important to look for the following features in an investment property and location: 

  • Security - is the property on a safe, quiet street, and does it have a home security system?
  • Ensure plenty of storage space 
  • Off street or undercover parking
  • Low maintenance
  • Local amenities and public transport options

Keeping these features in mind when finding the right investment property can help to increase your tenant appeal and command a higher rent.

When buying an investment property, it is important to consider the following factors when researching locations: 

  • Population growth
  • Tenant demand
  • Local price growth
  • Any developments planned for the area? 

These considerations will help ensure you choose an investment property in an area that is well positioned for long term growth. 

Get the latest property investment updates for your state or city

Investment Property Deposits

As with most home loans, you will typically need at least a 20% deposit for an investment property. In some cases, you may be able to get an investment loan with a deposit less than 20%, although with this situation you may incur lenders mortgage insurance (LMI). 

You may be able to buy an investment property with no deposit using a guarantor or equity in your existing home instead of a cash deposit. 

A guarantor is a person - usually relative - who will have sufficient home equity in their property to provide a guarantee in place of a cash deposit. Depending on your situation a guarantor may be in place of a full deposit. 

Similarly, if you own your home before purchasing an investment property you may have built up enough home equity to use as security on your investment home loan instead of a cash deposit. 

Investment Property Depreciation

Depreciation can work on an investment property in two ways - capital works deductions and depreciating assets. Capital works deductions refers to depreciation of the building itself. If your property was constructed between 1985 and 1987 the building cost can be depreciated by 4% annually. Those built after 1987 can be depreciated at 2.5% each year.

Depreciating assets applies to fittings and fixtures such as light fittings, stoves, cabinets, etc, and can be claimed for various lengths and rates depending on the asset. The ATO assigned an effective life and depreciation rate to thousands of items.  

For the full rules on how you can use depreciation on your investment property see the ATO’s guide here.

The length you can claim depreciation on an investment property depends on the type of depreciation - capital works deductions or depreciating assets. For capital works deductions, you may be able to claim a percentage of the construction costs for up to 40 years from the date construction was completed. The length you can claim depreciating assets for an investment property can vary and is determined by the ATO. Have a look at www.ato.gov.au for a list of rates and effective life of depreciable items. 

Depreciation is an area where it pays to get professional assistance to claim on your investment property. A quantity surveyor can inspect your rental property and draft a complete depreciation schedule that ensures you are neither missing out on depreciation deductions nor overstating your claim (which could result in tax penalties). Trying to estimate your own depreciation charge could leave you facing tax penalties if you get the figures wrong.

Depreciation on assets for an investment property can be calculated using one of two methods - Prime cost method or Diminishing value method. Using the prime cost method involves giving an equal tax deduction each year over an item’s effective life, whereas the diminishing value method allows you to claim for a higher amount in the first years of an item’s effective life and the amount gets smaller as the years go on. 

It is best to discuss this with your tax professional or seek financial advice to understand what method is right for you.

Equity on Investment Property

You can use your equity to buy an investment property by taking out a loan using your equity as security instead of a usual cash deposit. 

A general rule when purchasing investment properties using your home equity, is to look at properties that are a maximum of four times the cost of the amount of equity in your home. For example, if you have $250,000 in accessible equity and are looking to purchase a property for $1,000,000, you can put down a 20% deposit and still have $50,000 remaining for legal fees, stamp duty and other fees associated with the purchase.

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Using Equity to Invest guide

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General Property Investment Questions

An investment property is a property purchased with the intention of earning a return through rental income or capital gains with the future resale of the property, or both. 

You can make money from an investment property through rental income and capital growth. 

Your rental income can be calculated using rental yield, which is determined by dividing the annual rent by the value of the property. 

Capital growth is related to the overall increase in the value of the property. When building capital growth it is vital that you can afford to hold onto the property until you see a substantial rise in the investment’s value.

To begin property investing, it is important to have an understanding of your financial situation and plan your investment strategy accordingly. 

We have created a beginners guide to investing here to give you a starting point. Additionally you can speak with a Mortgage Choice broker who can provide you with expert advice and determine if property investing is right for your current situation. 

Negative gearing occurs when the costs of owning an investment property outweigh the income it generates each year. This results in a taxable loss, which may be offset against other income including your wage or salary, to provide tax savings.

To understand how much you can borrow for an investment property, you can use our home loan quick quote tool to receive a breakdown of how much you could borrow as well as the fees and costs involved. 

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1 https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/Taxation-statistics-2018-19/?page=6#Table8Individuals