Owning your own home has always been the Australian dream. Over the last couple of decades though, that dream has evolved. People often now want to own two or three homes. Property investment is widely viewed as a way to build wealth over the long term.
Doing your homework
Before you set out to build your property empire, it’s important to do the numbers and look at all the costs, risks and benefits, as well as consider what your goals are. For instance, is your main priority to offset tax while making long term capital gains? Or do you want to positively gear the investment and maximise rental yield to use it as a cash flow tool?
Speaking to your accountant or financial planner and getting their professional advice can help you clarify your investment goals. But before you do, this step-by-step process is designed to give you the background information you need to get on the property investment path.
How much can you borrow?
There are few different factors to consider when calculating what you can afford to borrow. Your income, current savings, financial commitments, living expenses and credit history will all determine your borrowing power. To get a rough indication of where you stand, simply use our borrowing power calculator to do the maths.
Equity is another big consideration for potential investors. If you own a home that has increased in value over the years, or you’ve made extra repayments, you may be able to use the equity in this property to help purchase an investment property. Your equity is the difference between the market value of your home and the amount you still owe on your home loan.
To get the full picture of how much you need to borrow, you will also need to consider how you want to structure your investment from a tax perspective. If you want to negatively gear the property, for instance, you may want to borrow more on the property. If, on the other hand, you want to positively gear the property – so the rent you receive outweighs your repayments and costs – you may need to buy less. You will also need to factor in things like capital gains tax and depreciation (which is greater on new properties). Again, it is important to get advice from your accountant or financial planner to help you decide what the best financial strategy is for you.
Budget for all your upfront and ongoing costs
Buying an investment property is all about crunching the numbers. So it’s important to factor in all the costs. Your deposit will be your biggest upfront outlay, approximately 20% of the property price.
Then comes stamp duty, a tax levied on house purchases by state governments. It varies depending on which state the property is in and the purchase price. It could also be significantly less if you’re buying off the plan or purchasing a house and land package. Our stamp duty calculator can help you see how much you will need to pay.
There’s also a list of other extra costs associated with purchasing a property, such as:
- legal and conveyancing costs
- accountant’s advice
- pest and house inspections
- mortgage insurance
- land tax.
You will need to allow around 5% of the purchase price to cover the stamp duty, plus these expenses.
After you’ve bought the property, there are also ongoing costs to think about too, like council and water rates, insurance, possible strata levy and general maintenance and repairs. You should also expect occasional vacancies, so allow for a few weeks of vacancy each year.
Getting together a rough idea of these ongoing costs, combined with an estimate of your weekly repayments minus your expected rent, will give you a better picture of what your monthly investment outlays will be and what sort of impact that might have on your household cash flow.
Find the loan that fits you
When it comes to deciding on the right investment loan you are blessed for choice. But deciding which one will work best for you can be difficult. So let’s talk about all the pros and cons of the different investment loan types.
Principal and interest (P&I) vs Interest only
Interest only loans are not for every type of borrower, but they can be useful for property investors. That’s because investors may be able to claim interest paid as a tax deduction. So you pay lower monthly repayments, because you’re not paying the principal down, while potentially enjoying a tax deduction on the interest. By using an offset facility you can reduce the amount of interest you pay even further.
If you want to positively gear your investment, or have a different tax strategy, a principal and interest loan (P&I) can help you pay down the loan quicker and establish a better equity position. Say you borrowed $300,000 at 5% p.a. interest. If your loan was principal and interest, after 5 years you would have paid over $34,000 off the balance of your investment loan. With an interest only loan, in comparison, the balance of loan will remain the same so.
Fixed vs Variable
Market conditions play a big part in choosing between a fixed rate or variable rate loan.
Usually a variable loan offers a more competitive rate, but the rate can go up or down with the market. So when interest rates are relatively stable, as they have been for many years, a variable loan can help investors save on interest and minimise their repayments. They also tend to offer more repayment flexibility, can be easier to refinance and often include features like offset and redraw.
If rates look like they could go up, on the other hand, then it can be a great idea to lock in your rate for 1 to 5 years with a fixed rate loan. So if rates do shoot up you won’t be caught out by the increased repayments.
Get a pre-approved loan
When you’re ready to start the property search, there’s one thing you should do first. Talk to a lender and organise home loan pre-approval. It will help confirm what a bank will allow you to borrow,setting you up for a successful property search.
In the end you’re under no obligation to take that loan, but it can show real estate agents and buyers that you’re a serious purchaser and you are in a position to make an offer on the property or to bid at auction. It’s also a great way to keep yourself on track.By knowing what your limit is, you have a target price range for your property search.
So you’ve done your research and found out your borrowing limit. Time to go property hunting. It can be easy to get emotional and fall in love with a stylish interior or to-die-for view. But remember an investment property is purely a financial decision. It’s not for you to live in, it’s for you to make money from – so you need to think like an investor, not a home buyer.
Look for properties in growth areas where there is strong demand for rental accommodation and that are close to transport, universities, schools and community facilities like parks and shops. Do your research on the area and find out what the capital growth has been like over the years, what the average rental returns are and look for a low vacancy rate (high vacancy could indicate a less desirable area).
It’s also a good idea to talk to local real estate agents and property managers to see what kind of property is in demand. One bedroom apartments may be preferred over two bedrooms in certain areas, for instance, or townhouses with gardens may be more popular than units. When inspecting properties, look for features with mass appeal and for practical things like second bathrooms, lock-up garages and storage.
To find out more about exactly what you should look for in an investment property read our article, How to find the right investment property.
Buying the property
Once you’ve found a property you like, the buying process is very similar to buying your own home. If you have your loan pre-approval, then you know your borrowing limit. So if you’re confident this is the place and it’s within your price range, it’s time for your pest and property inspections. If they’re OK, then it’s time to make an offer. Once you agree on a price with the seller and their agent, talk to your lender to ensure the finance is ready for settlement and pick the loan that’s right for your needs. Then the contract goes to your solicitor and conveyancer to check everything is in order.
Get a helping hand from a specialist
Our ING home loan specialists are here to help. They can talk you through everything from the buying process to calculating your equity and give you a clearer picture of what your next steps should be. If you’re ready to go property hunting, they can also arrange loan pre-approval to get you on your way.
The ING Borrowing Power Calculator is not an offer of credit and is an indication only based on the stated assumptions and the information entered by the customer.
The information is current as at publication. Any advice on this website does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. Deposit products, savings products, credit card and home loan products are issued by ING, a business name of ING Bank (Australia) Limited ABN 24 000 893 292, AFSL and Australian Credit Licence 229823. Living Super, a sub-plan of OneSuper ABN 43 905 581 638 is issued by Diversa Trustees Limited ABN 49 006 421 638, AFSL 235153 RSE L0000635. The insurance cover offered by Living Super is provided by Metlife Insurance Limited ABN 75 004 274 882, AFSL 238096. ING Insurance is issued by Auto & General Insurance Company Limited (AGIC) ABN 42 111 586 353 AFSL Licence No 285571 as insurer. It is distributed by Auto & General Services Pty Ltd (AGS) ABN 61 003 617 909 AFSL 241411 and by ING as an Authorised Representative AR 1247634 of AGS. All applications for credit are subject to ING's credit approval criteria, and fees and charges apply. You should consider the relevant Product Disclosure Statement, Terms and Conditions, Fees and Limits Schedule, Financial Services Guide, Key Facts Sheet and Credit Guide available at ing.com.au when deciding whether to acquire, or to continue to hold, a product. Before interacting with us via our social media platforms, please take a minute to familiarise yourself with our Social Media User Terms https://www.ing.com.au/pdf/Social_Media_User_Terms.pdf.