Australia’s property market is booming, low-interest rates and greater access to home loans has made purchasing an investment property easier than ever. However, buying an investment property still represents a huge financial commitment and requires a great deal of consideration. It takes many individuals years to pay off their initial mortgage let alone save up enough for a deposit on an additional property.
It is not uncommon to get swept away with the allure of rental income and capital gains and forget the risks involved with taking out a new home loan. We recommend consulting the pros and cons listed below to see if you’re ready to take the next steps.
Pros of an Investment Property
- A long-term, secure investment, that is more stable than other investment decisions
- They generate fixed returns
- If you can secure a property where rental income is greater than your loan repayments, then you will not need to invest any additional funds
- As you are generating income from your investment property there are far greater tax deductions available to you
- A good way to diversify your investment portfolio
- By building equity in your investment property you can leverage it to get another loan and increase your property portfolio
Cons of an Investment Property
- It is often very hard to save up enough money to purchase an additional investment property. Especially if you are still paying off your existing mortgage
- Whilst property is a secure investment, it may be hard to sell quickly and at a short notice meaning it is not a very liquid asset
- Buying a property does not guarantee tenants. You may have to spend time and money getting the house up to scratch
- On the other end of the scale your rental income may be lower than your mortgage repayments meaning you must continually invest money
- House prices and property value are not guaranteed to increase and you need to be wary of a potential decline in the market
- Listen to the Experts and Consider your Finances
After completing your own self-assessment as to whether you are ready to endure the potential highs and lows of investing in another property, we suggest that you always seek professional help. It may seem clear to you or your family that you are ready to and can afford to purchase another property. However, many individuals have been in your same position and then found themselves over-extended and unable to afford the repayments on their new property.
We recommend at the bare minimum speaking to an accountant who can prepare a cash-flow analysis to see if you will be able to afford taking on this investment. If you want to take greater precaution, solicitors, conveyancers and financial planners can all provide sound advice as to whether you are ready to purchase another property.
Understanding What You Can Afford
Before researching potential investment properties, it is important to consult your bank or home loan lender and get a rough idea of how much you can borrow. LoanDolphin carries no contractual obligations and can be used as a great research tool to see the different amounts and terms brokers are willing to offer you.
Once you have found a home loan that seems right for you, then securing a pre-approval on that loan can give you a set price range to shop around with. This amount should be in line with what you and your accountant have previously determined using a cash-flow analysis.
Be Prepared and Have an Investment Strategy
It is important to go into the purchasing process with a sound investment strategy in mind. As how you wish to derive value from your investment will affect the type of property you purchase and the size of your home loan. The two most common strategies are as follows,
Buy and Hold, this refers to the traditional method of purchasing a property and generating rental income to pay off your mortgage. With a long-term goal of leveraging capital growth.
Renovation or Flipping, as the name suggests making alterations to the existing structure to either attain greater rental income or sell the property for a profit.
Other strategies include negative gearing, positive gearing, passive property development and active property development.
Make Sure You Understand the Market
Location, location, location. Once you know what type of investment strategy you wish to pursue you can go about researching different suburbs. RP Data and Residex offer free suburb profiles that include metrics such as days on market (DOM), rental yield, price growth and vacancy rates. Areas with greater rental yield and lower vacancy rates will suit a buy and hold strategy. Whereas price growth and DOM are a better indicator as to the success of a renovation or flipping strategy.
You will also need to consider the property type, do you wish to invest in a family home or an apartment, an old dwelling or new development. Each carries its own pros and cons and should be considered in line with your investment strategy.
So, You’ve Found the Perfect Property
Having completed all the previous steps and settled on an investment property that you can afford, there are some final steps.
- Speak to your broker to prepare your home loan documentation
- Hire a surveyor. This can help maximise your tax deduction
- Have the property appraised independently, a proper inspection before the purchase can save you thousands down the track