Buying an Investment Property Guide
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A Complete Guide to Buying an Investment Property
When it comes to growing personal wealth, for many Australian’s, the property remains king. This is no doubt largely thanks to the property remaining a fundamental part of the ‘Great Australian Dream’. Once considered an option only available to the very wealthy, property investment has also become more common and more achievable with time. According to a report from Core Logic, investment mortgages reached a record-high of 55% in 2015, up from just 20% back in 1993. And with Australian investment properties averaging 8% gross returns per annum over a ten-year period (2007-2017), it’s easy to see why so many people are interested in property investment.
But when it comes to investing in property there are often more things to consider than if you’re buying a home to live in. Lenders may have stricter eligibility requirements when it comes to investment home loans. You might need to have a bigger deposit and you may find that the interest rates available to investors are slightly higher than what you would be offered for a typical mortgage.
To help you get started on your property investment journey, the experienced team at Coronis Finance have put together a free step-by-step guide to property investment. The ‘Property Investment Guide’ has been designed to provide clear and concise direction, while also answering many commonly asked questions relating to property investment.
6 Tips for Buying an Investment Property
- Focus on finding the right property when it’s at the right price
- Take time to do the math
- Try to get a good understanding of the current property market
- Remember that property investment is a long-term venture
- Seek expert advice at each stage of your investment purchase
- Choose the right mortgage for your investment property
1. Focus on finding the right investment property when it’s at the right price:
The long-term goal of property investment is to achieve capital growth. In order for this to happen, you not only need to choose the right property, but you also need to buy when it’s at the right price. In order to do this, you’ll need to undertake some thorough research. Start by looking at how much properties are currently selling for in your target area. Become familiar with current market trends, so if any bargains appear on the market, you’ll be able to identify them.
2. Take time to do the math:
If you have a plan in place to manage your cash flow then you’ll likely find owning an investment property is more affordable than you think (thanks to regular rental payments and potential tax deductions). But it is imperative that you take time to carefully and accurately prepare a budget (factoring in all costs) before you go ahead with purchasing an investment property. If you don’t, then you risk ending up asset-rich but cash-poor. If you’re not careful, this could result in you having to sell your investment earlier or for less than you had planned. To avoid future financial stress, talk to one of our experienced investment mortgage brokers about what kind of costs you’ll encounter.
3. Try to get a good understanding of the current property market:
There is a great range of independent data available on property market trends, average rental yields, suburb demographics and even proposed future developments. This kind of information can be invaluable when it comes to deciding what kind of investment property you want to buy and where. Review relevant reports and analytics from independent groups such as Core Logic, Domain and Realesatate.com.au and subscribe to updates from experienced property investors.
4. Remember that property investment is a long-term venture:
The great thing about property investment is that you’ll likely see consistent growth over time. But the key word here is ‘time’. Don’t expect property values to double in five years – while it’s never impossible, it is highly unlikely. Rather than focusing on ‘flipping’ a property as soon as possible, try to maintain a long-term viewpoint. You may find that a slow and steady increase in your property’s value over time will accrue enough equity for you to buy a second investment property, allowing you to increase your investment portfolio.
5. Seek expert advice at each stage of your investment purchase:
No matter how much research you do, it is always a good idea to seek out the advice of experienced industry professionals. Start by talking to a mortgage broker, who can help you determine your borrowing potential and give you access to important data on relevant locations and property developments. Talking to a local real estate agent will help you to get a feel for the property market in your area, while a property manager can give you realistic expectations when it comes to potential rental yields. And once you’re ready to go ahead with a purchase, a property inspector can give you peace of mind that the house you’re buying is a solid investment.
6. Choose the right mortgage for your investment property:
There are a wide range of investor loans currently available but finding the right one can be a challenge on your own. To ensure you choose the right mortgage for your investment property, make an appointment to speak with a Coronis Finance mortgage broker. We can talk you through the various options available, as well as breaking down the pros and cons of each product. We can also talk to you about your future financial goals and then help you to choose a mortgage product that will be most supportive of those long-term goals.
Why Should I Use A Mortgage Broker When Buying an Investment Property?
Regardless of whether you’re a first-time property investor or an experienced professional, a mortgage broker can provide valuable insights and access to a wide range of competitive home loan products. Mortgage brokers are guided by ‘Best Interests Duty’ legislation, which essentially means a broker is bound to always act in the best interests of the borrower. So, you can have peace of mind that the advice you receive from a mortgage broker is trustworthy. Additionally, partnering with a mortgage broker will:
Help you find the best loan for your specific circumstances:
Finding the best loan for you personally involves a lot more than just identifying the product with the lowest interest rate or the biggest range of features. The right home loan for you will depend on many things, including the size of your deposit, what features you want to be included, what your plans are for the investment property and what kind of tax benefits you want to avail yourself of. A mortgage broker will go through all the relevant details, identify which mortgage products will fit the bill and then make a recommendation based on their industry expertise.
Give you an accurate assessment of your borrowing power:
Before you can really start planning your investment property purchase, you need to get an accurate assessment of just how much you can afford to borrow. Additionally, a broker will be able to give you a precise calculation of what your ongoing repayments will be. This will allow you to create a detailed budget, ensuring you’ll be able to manage your cashflow and service the loan without any trouble.
Enable you to decipher the terms and conditions:
When it comes to making a significant financial purchase, there are always terms and conditions. And not all of them are easy for a layperson to understand. To ensure you don’t encounter any nasty surprises down the track, a mortgage broker will go through the terms and conditions with a figurative fine-tooth comb. They’ll be able to identify any clauses that could impact on your use of the various loan features and give you a complete breakdown of applicable fees and charges.
Provide advice on how you can save money and manage your budget:
A mortgage broker can review your current financial situation and then provide tailored advice on how you can save money on your investment property. They can make suggestions regarding loan setup and how this can have an impact on your tax, as well as offering guidance on things like managing cashflow and evaluating the pros and cons of an interest-only loan.
Answer all of your questions about property investment:
While it’s possible to find answers to a lot of your questions online (thanks, Google!), there’s nothing quite like being able to speak to a professional. When you talk to a mortgage broker, you’ll be able to ask a broad range of questions that are specific to your particular situation. You’ll have access to a treasure-trove of industry experience and property investment knowledge, giving you all the information that you need to make a smart property investment choice.
Property Investor FAQ
Can I use equity to buy an investment property?
Using the equity in your current home can be a great way to get into property investment. Equity is the difference between what you currently owe on your mortgage and what your property is considered to be worth. So, if you currently owe $300,000 on your mortgage, but your property is valued at $650,000, then you have an impressive $350,000 worth of equity at your disposal. To find out more about how equity can help you to buy an investment property, make an appointment to speak with one of our mortgage brokers.
What should I look for when planning to buy an investment property?
When you’re buying a home to live in your priorities should be different to when you’re buying an investment property. According to many property investment experts, the key factors to consider include:
- Property Location: You should be looking for areas with solid population growth and a diversified economy.
- Nearby Infrastructure: Infrastructure often leads to capital growth, so keep an eye on areas with existing or proposed infrastructure.
- Property Age: You’ll need to weigh up all the pros and cons, but generally speaking, properties that are new (or near new) will offer greater tax deductions due to depreciation.
- Capital Growth & Yield: It’s important to get the balance right between anticipated capital growth and annual rental yield. Look for something with a yield of at least 5%.
- Property Price: Compare the asking price with the median house price for the suburb. Look for properties that in the middle of the median range, as these will usually be easier to sell in the future.
What should I avoid when planning to buy an investment property?
There are a couple of things you’ll need to watch out for when buying an investment property. Primarily, these are things that could impact capital growth or lead to high tenant vacancy levels.
- Limited Growth: Areas that rely heavily on a single form of industry can be adversely affected should that industry slow-down (such as when a mine closes).
- Negative Features: Look out for factors that could put people off in the future. For example, people are less inclined to rent or buy properties that are located on busy roads, adjacent to factories or that have power poles on their nature strip.
- Expensive Features: A swimming pool may seem like a plus, but they are expensive for property owners to maintain. Similarly, an older property may seem primed for a renovation, but if it’s heritage-listed you may encounter a lot of unexpected compliance issues.
- Investor Only Suburbs: If every property in the suburb is owned by an investor then competition amongst rentals is going to be fierce. Look for areas where there is a mix of investment and owner-occupied homes.
Should I buy a new house or an older house?
As already mentioned, it’s important to consider the specifics of each property prior to making a final decision. But the decision on whether to buy an older house or a new one will often depend on your future plans for the investment property. If you want to ‘flip’ the house and sell it as quickly as possible for a profit then an older property is probably the way to go. However, if you intend to lease the property then you may be better off looking for something new or nearnew. A newer property will be low-maintenance and offer higher depreciation (which is important for tax deductions).
What’s more important –rental yield or capital growth?
If you plan to lease out the property then the rental yield is an important factor to consider. A rental property with a gross annual yield of 5% or more should enable you to service the loan without encountering cash flow issues. However, if the point of the investment is to generate future wealth, then you need to look for something that promises solid capital growth.
What kind of research should I do before I buy an investment property?
Ideally, do as much research as you possibly can. The more informed you are, the better equipped you’ll be to make informed decisions. Start by doing some online research – look for investor and property blogs, read up on various suburb profiles and start making a list of suburbs that offer a good mix of capital growth and rental yield. You can then start looking for more specific advice from local experts (this does not include helpful friends, family, neighbours or former colleagues who have never invested in property). Talk to real estate agents or, if possible, other local investors. Mortgage brokers can also offer valuable insights when it comes to property investment, so don’t be afraid to give one of our team members a call.
Will I be able to afford an investment property?
Many people believe they can’t afford an investment property when in actual fact they could. This is often the case when you’re renting in a suburb that you couldn’t afford to buy in or when you already have a mortgage. The best thing to do is to speak to one of our mortgage brokers. We’ll be able to review your current financial situation and offer solutions that could potentially enable you to purchase an investment property. For example, you may be able to access the equity in your current home, or you could look at ‘rentvesting’ (continuing to rent where you want to live while buying an investment property in a more affordable suburb).
Is it possible to invest using my super?
It is possible to purchase an investment property through a Self-Managed Super Fund (SMSF). This is becoming an increasingly popular course, as more people want to take control of their superannuation investments. Keep in mind that you will only be able to buy an investment property through an SMSF in compliance with set rules and subject to strict lending criteria. For more information on SMSF property investment, contact Coronis Finance to speak to one of our in-house Financial Planners.