February 01, 2016
Investing in property is something many people have on their to-do lists, but actually taking the leap can be difficult.
Before you jump in, there is research you should do and questions you should ask yourself. If you are yet to start investing, then talking over the following questions with us could help set you up for the future and avoid costly mistakes.
1. Why am I investing in property?
If your aim is to build cash-flow to retire on, your investment strategy needs to be different to someone looking to build equity for capital growth. Having a clear goal in mind before you start will make reaching that goal much easier.
2. Where is my deposit coming from?
Few of us have a spare home deposit in our savings account – but many of us have access to equity in our own homes. It can be possible to extract this equity to use as a deposit. Discussing and creating a strategy will ensure you take the right steps now to get to your goal in the future.
3. How much can I borrow?
Every lender will assess your income differently, so there is never a single answer to this question. Your individual circumstances (e.g. buying individually or through a Trust or Company, your duration and type of employment, number of properties owned, amount of rental income and your deposit etc.) will fulfil some lenders’ criteria better than others.
Some banks are much more likely to fund your first purchase than your sixth, and you may also find it difficult to get an approval with the same lender after a few applications.
4. What property do I buy?
This also depends on your investment strategy and disposable income. It is important to understand how much money you have to commit per month to achieve your goals for capital growth and cash-flow. There are also certain postcodes and property types and sizes that will affect what LVR (Loan to Value Ratio) you can borrow. Even if you have a bank pre-approval for a certain amount, your purchase property may not be acceptable to that lender. It’s important to know what the limitations of your chosen lender are, before looking for your property.
5. What type of loan should I get?
There is always a media commentary on fixed vs variable loans. There are advantages and disadvantages to both. Many of my clients are looking to pay down their owner-occupied loans as quickly as possible. With variable loans you have the option of making extra repayments and redrawing available funds if needed. If you are limited on surplus cash you may prefer the certainty of a fixed rate so you know what your expenses will be and can plan accordingly over that term.
There are also loan options – like offset accounts – that can reduce your interest costs without affecting the long-term tax deductibility of your investment loan.
If suitable for you, we also widely recommend interest only loans for investment loans. This frees up any additional funds to reduce owner-occupied and other non-tax deductible debt. Keeping the cash-flow positive is one of the most important steps to building a large, sustainable portfolio.
6. What is my next step?
Depending on how many properties you plan to accumulate, you may be able to get an investment property revalued after some growth or renovations in order to extract equity for the next purchase.
It’s also important to regularly review your loans and your goals. A product that was the best option for you two years ago may no longer be suitable. As your portfolio appreciates, there may be options that become available that are an improvement on your original loans.
Contact either Owun, Suzanne or Costa on 02 9517 1818 or email@example.com to discuss your options. Or, if you feel like dropping in at our office, we are located at Suite 106, Flourmill Studios, 3 Gladstone Street, Newtown 2042. Be sure to share our blog on Facebook and Twitter and let others join the conversation!