Help me purchase an investment property
Property investment can be a very rewarding endeavour. But it does require careful and thorough planning in order to maximise your returns and manage taxation issues.
The first step is to be clear regarding your financial goals, objectives, needs and appetite for risk and we strongly urge you to talk to your accountant or financial adviser early in the piece about your specific plans and circumstances. As part of that discussion, you’ll need to weigh up the relative benefits and risks of property investment. So here are some that spring immediately to mind:
- You can earn rental income
- If your investment property increases in value over time, you can benefit from capital growth
- It can be a great step onto the property ladder if you can’t afford to buy where you want to live
- It could provide taxation benefits through negative gearing (please see your accountant for advice)
- Property investments may be easier to understand than other types of investments
- Property investment can provide diversification benefits if you already have other investments.
- The value of your investment property could decrease over time
- There may be a shortfall between the rental income you receive and your repayments and expenses
- If your rental property isn’t occupied, you’ll still need to cover your repayments and expenses
- If you need access to cash in a hurry, a property takes time to sell
- There are usually considerable costs when buying and selling a property
- It’s not always easy to find the perfect tenant.
When you’ve considered the risks and benefits of property investment and decided that it’s right for you, the next step on your property journey will be to work out your requirements. This can be different when you’re considering an investment property as opposed to a place to live, but it’s no less important.
Regardless of whether this is your first purchase or fifth, it’s important to factor all the costs into your budget when working out how much you need to borrow. This is particularly important when purchasing an investment property, as it can heavily impact your return on investment.
The glow of an investment property can wear off quickly if your mortgage repayments force you to sacrifice too many of the good things in life, so take the time to really work out your budget.
Don’t forget that interest rates and your repayments may go up in future, and you may have periods when your property isn’t tenanted. As a general rule, most lenders assume that a property will be tenanted 80% of the time, so you should build in a similar contingency.
Even though you’re purchasing an investment property and the interest may be tax deductible, it’s just as important that you choose the ideal loan for your circumstances. Getting this right can save you thousands of dollars over the life of your loan and give you flexibility for the future.
Gain loan pre-approval
Acquiring loan pre-approval will allow you to start shopping around for your investment property with the confidence of knowing exactly what you can afford to offer. This is particularly important if you’ll be bidding at an auction, as auction purchases tend to have no cooling-off period.
Find your property
Don’t lose sight of your objectives and don’t forget that you’re probably not going to live in the property yourself. Keep a cool head and always have an eye on your investment return.
When you think you’ve found some interesting properties, check out our free property reports to help decide if the price is right. At this stage, it’s also worth making friends with a reliable real estate agent that you can eventually use to manage your property. Don’t be afraid to ask their advice on the property and purchase price, either. After all, it’s going to be their job to keep it rented!
This is arguably the most important step of all. Most renovation and building jobs that run over time or budget do so because of a lack of planning, changes to the design half-way through the build, or by failing to identify the extent of work required to achieve your dreams. So a little bit of time and money spent up-front to define your objectives can go a long way towards saving you lots of time, stress and unnecessary expense in the long run.
Manage your risks
Property investment does have risks, but there are some easy steps to minimise them. When you’ve found the right property and you’re ready to make an offer, be sure to make it ‘subject to finance’. Even if you have pre-approval for a new loan, you’ll need to formally apply for it and receive unconditional approval before you can actually pay for the new property.
You may also need to make the offer subject to a satisfactory building inspection if you haven’t already had one. As with any property purchase, you should always have a building inspection before signing the contract or during the cooling off period. It’s not worth skimping on this step.
Equally important, engage a reputable property manager to take care of your property. Finding the right tenant is not easy and property managers are expert at assessing potential tenants. It doesn’t mean they’ll always get it right, but generally speaking, it’s money well spent for a hassle-free investment.
Finally, you may wish to consider taking out Landlord Insurance to cover your investment. You might be surprised what you can cover.
This is general advice only and doesn’t take into account your objectives, financial situation or needs. Conditions, fees and lending criteria apply and are available on request.