May 02, 2018 by Melinda Halloran
Property is a popular form of investment in Australia. From how to access funds to finding the right property and understanding the tax benefits, here are our top five tips for first-time property investors.
1. Buy with your head, not your heart
This is the golden rule of property investment. Remember you are not purchasing your dream home; you are making an investment.
For example, your favourite suburb may not have the best growth potential and your decorating style may not have wide market appeal. Factors like these will influence what area you buy in and which type of property to purchase.
See our guide on how to choose an investment property for details on property type, things that appeal to tenants and location.
2. Don’t take shortcuts with your budget
When setting your budget, chances are you will have accounted for large costs like annual body corporate fees, your deposit and legal fees.
However there are additional costs that can cause cash flow problems if you don’t account for them. These include:
- Property maintenance
- Property management
- Loan fees
- Periods when the property may be vacant
- Bills and utilities (such as rates and water)
- Insurance
3. Understand the property market
Just like your budget, your research should be as thorough as possible. Once you know roughly how much you have to invest in property, look for areas that offer value for money in your price range as well as high tenant appeal.
Get to know the area you want to buy into really well by attending auctions and inspections, and speaking with agents, property managers and other buyers.
Things to account for in your research of an area include:
- Vacancy rates
- Rental yields
- Historical property values
This data will give you a good snapshot of tenant appeal and your earning potential. Also be mindful of any development planned for the area and how this is likely to affect the local property market.
4. Speak to your accountant
One perk of owning an investment property is the tax benefits. You have probably heard of negative gearing, but additional tax benefits include travel to the property and annual depreciation. By speaking to your accountant about tax-saving strategies, you can ensure the property works even harder for you.
Your accountant or financial planner can also help you to put together a strategy based upon the type of property you plan on buying, your cash flow and how long you intend to keep it for. This strategy may also affect the type of loan you apply for (see below).
5. Get to know the different types of investment loans
When it comes to property investment, these are the three most common ways of accessing finance.
Standard home loan
Most investment property loans will be either be a standard fixed or variable home loan. Some investors will choose to fix their interest rate so that their interest repayments for the year can be calculated in advance.
Doing so allows them to prepay 12 months of interest upfront, which is beneficial in instances where they need to offset their income for that financial year. This tactic is most appealing to investors who have a fluctuating income that is higher in some financial years than others.
Refinance
If you have been paying off your home for some time now, it is a valuable asset you can use to build even more wealth.
For example, if you have paid $250,000 off the principal of a $600,000 home loan, you have $250,000 in equity you could be leveraging.
Refinancing allows you to unlock this equity and use it as security on a new loan for an investment property. That means you purchase an investment property without having to save a deposit for the new loan.
Learn more about how this works with our Refinancing Guide.
Interest-only loan
Interest-only loan repayments cover the interest portion of the loan rather than the principal (this is paid off when the property is sold). This type of loan is suited to investors who plan to sell the property for profit in the short term, rather than owning it outright. The other advantage for investors is that the interest repayments are tax deductible.
Be mindful, however, that interest-only loans are capped for a certain period of time (usually up to five years), after which you will need to start repaying the principal. These loans are also becoming increasingly difficult to get approved, due to new regulations.
As you can see, there are many paths to purchasing an investment property, and using tactics like refinancing means you could own an investment property even sooner. For a free discussion of your loan options as an investor, complete the form below. – Luke
