How To Buy An Investment Property

So you want to start investing in property – but where to begin?

We take a look at how to find the right investment property, how to choose a loan, and whether borrowing against your home is a good idea.

Property investment in Australia

Property is one of the most common forms of investment in Australia, with the most recent data from the Australian Taxation Office showing that 2,207,905 Australians, or 8.6 per cent of the population, own an investment property. According to ASIC’s Moneysmart website, the average return on an Australian property investment over the last 10 years was 6.3 per cent.

Choosing the right property

There are two ways that property investors make money from their investment – rental yield and capital growth. Yield is the annual return you receive on investment property, while capital growth is achieved when the value of the investment property increases over time.

The key to finding the right property that will hopefully provide both is research, research, research. Take some time to get to know the real estate market in the area you’re looking to buy in, so you can identify a bargain (or spot an overpriced property) when it comes along. Research the history of property prices in the area and find out whether there are any planned infrastructure works or other changes that could impact property values.

Find out what the rental yields are for different types of properties in that area. Right now, Perth has some of the most attractive yields in the country, with many suburbs experiencing more than 5 to 6 per cent, and has been one of the few cities to experience a good rise over the past year.

Understand the demographics of the area’s renters, and what they’re likely to look for in a home. For example, in a suburb popular with families, a large backyard and proximity to the local school would make the home more desirable to potential tenants. In an area popular with students it might be equal sized bedrooms. A good property manager can advise you on what is in demand in the area you’re thinking of buying in.

Getting the right loan

Investment loans usually have different approval conditions and features than owner-occupier home loans. Often, they’ll have a lower loan-to-valuation ratio (LVR), which means you need a larger deposit to secure the loan. They also usually have a higher interest rate than home loans.

There are many options when it comes to financing your investment property purchase and everyone’s situation differs, so it’s important to get sound independent financial advice before launching in. A trusted mortgage broker and financial adviser can help you determine whether a fixed or variable interest rate is right for you, which of your loan costs will be tax-deductible and the best way to structure your loan. We suggest talking to our friends at Custom Finance Solutions.

Borrowing against your home – yay or nay?

You might have heard of people borrowing against their own home, or using their equity, to finance the purchase of an investment property.

Equity is the value of your home, minus any money you still owe on it. For example, if your home is worth $500,000 and your mortgage is $230,000, you have $270,000 worth of equity. Banks lend against usable equity, which is calculated as 80 per cent of your home’s value minus what you still owe on it. In our example, that looks like this:

  • Home value $500,000
  • 80% of home’s value $400,000
  • Minus the $230,000 mortgage = $170,000 useable equity

Leveraging the equity you’ve built up in your own home may be an effective way to buy an investment property, but it really depends on your individual situation. A trusted independent financial adviser can help you to determine whether it’s a viable option for you.

Who do you need to see?

An independent financial adviser and/or a property-focused accountant can help you assess your financial position and work out whether buying an investment property is the right move for you. Getting trusted independent financial advice specific to your situation is a must before jumping in. For a loan, we suggest speaking to the experienced team at customfinancialsolutions.com.au.

If you decide to go ahead, a good property manager will help you to get the best value from your property investment. From finding the right tenants to suggesting when the rent should be raised (and by how much), advising on tenancy law to organising maintenance and repairs, a good property manager is the key to smooth and successful property investment.

If you’re looking for an experienced, professional and friendly property management team in Perth, contact us today.

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