Investing in a property is one of the best ways to earn a passive income. Buying an investment property is likely to be the one of the biggest purchase you will ever make which is why it’s important to be guided correctly throughout the process, from buying through to managing it effectively.
In this curated guide, you will learn about things such as choosing the right location and property type, tax benefits, the ongoing costs of owning an investment property, how to use a home loan calculator, investment strategies and more.
7 smart questions to ask when investing in property
Making an informed decision when investing in a property is imperative which is why you should decide with your head and not with your heart. To help you know you’re making an informed decision, here are the seven questions you need to ask when investing in a property:
- How much can I borrow?: Before you take out a loan, ask your lender what your borrowing limit is so you know what you can afford to buy.
- What sort of property do you want?: Do you want one that is ready to lease? Or do you want one that you can add value to in a chase for higher rent?
- Does the property you want to buy have a long-term tenant? It can be an advantage to have a tenant who will rent your property for an extended period of time. So it’s best to know this before signing the contract.
- Can I see the flood plan? It’s vital for investors to know about the flood plan so they are aware of the risks.
- What is the likely rental yield?: Make sure the property you buy will attract the returns you need to service your loan.
- Are there any future developments planned for the surrounding area?: Developments can help or hurt your property's value so get to know the future developments in the area.
- How big are the rooms? Make sure that there is enough room to fit in the furniture, and there is enough space for storage.
How to choose the right investment property
There are a range of investment dwelling options, from houses with backyards to compact inner-city apartments. It’s necessary to have a hard think about what the right property is for achieving your financial goals. Here are some choices when selecting the right investment property:
- Investing in an apartment: There is no backyard to maintain, however, there are associated costs such as strata fees for the maintenance of the compound. Apartments are a popular choice for both professionals and singles. If you buy in the right area, this can be a sound investment.
- Buying a townhouse: A mortgage on a townhouse may be significantly less than for a larger home and you could still attract a variety of potential tenants, from young families to older couples.
- Taking out a mortgage on a second home: Many suburbs in capital cities are bursting with schools, parks, shops, and other useful amenities which can have an appeal to families.
Owner-occupied vs investment property
You will need to indicate to your lender that you’re applying for an investor loan because this will affect your interest rate and mortgage repayments. The same can also apply to things like your local council rates, which believe it or not, can actually be more expensive for an investment property.
Why Location Is Important For Property Investment
Location has a massive bearing on a property’s potential investment return and its desirability. The main criteria when looking for a good location is the potential growth and future development of the area. Here are some characteristics that make an an area suitable for property investment:
- Infrastructure: This tends to increase the value of a property and the local employment rate. This translates to a low rental vacancy rate.
- Amenities: People value convenience, so proximity to shops, restaurants, cafes, medical facilities, public services and parks will help add value to an investment property.
- Safety: People want to live in a neighbourhood where crime is low.
- Transportation: The ease of commute can increase the value of your property.
- Schools: Many young families also look for good primary schools that are a short walking distance. So investing in a property near a good school can be a winner.
Ongoing Costs When Owning an Investment Property
A lot of people calculate their cash flow based solely on their expected mortgage expenses and rental income. But failing to take into account all of the ongoing costs can result in poor investment decisions. Here are some other ongoing costs to take note of:
- Repairs and maintenance: There are many things that can go wrong with a property. It’s important that you have funds set aside for these maintenance expenses just in case.
- Body corporate fees: You will need to pay body corporate fees if you own a unit or a townhouse that’s within a complex. These fees are used to maintain the amenities (eg. mow the lawns, clean the pool, service the lift, etc.).
- Insurance: This will cover your property against loss or damage caused by tenants, whether it is by accident or deliberate.
- Property management fees: You will pay these if you hire a property manager for your property.
- Council rates: These are paid on an annual basis. The rate levied on a rental property will vary depending the local government area.
Claiming Depreciation on Your Investment Property
Buildings and the items inside them decline in value over time, so the Australian Taxation Office (ATO) allows property investors to claim the loss of value as a tax deduction against their taxable income every financial year. This is called property depreciation. There are two types of allowances you can claim.
- Depreciation on Plant and Equipment: This refers to the items inside the property such as the oven, air-conditioners, carpets, and more.
- Building Allowance: This refers to the cost of constructing the building itself including materials, garage driveways, brickwork, and more.
To claim depreciation on an investment property you will need a tax depreciation schedule. A tax depreciation schedule is a comprehensive report usually prepared by a specialist Quantity Surveyor that outlines all depreciation deductions claimable for a residential investment property.
House vs Apartment: Which Is a Better Investment?
If you plan to invest in real estate, you will need to choose what type of property to buy, and this generally comes down to a choice between a free-standing home or an apartment. Here are the differences between the two:
Investing in apartments:
- They are usually more affordable to buy.
- They are appealing to young Australians who want live near their workplace.
- They require less responsibility since you have the body corporate to take care of repairs and maintenance.
- However, you will need to pay for body corporate fees for the amenities.
Investing in houses:
- There is land which can appreciate overtime.
- There may be long-term growth depending on the location you’re investing in.
- It gives you freedom to do a renovation that can increase the value of the property and the rent.
- However, you are accountable for managing the repairs and maintenance.
Whichever you choose, it’s important to consider your financial situation, research the market, go for areas with higher potential growth and get the right home loan to ensure that you maximise the return on your investment.
Buying a property has a lot of associated costs. You will need to accurately calculate the cash flow from your investment property, and your borrowing capacity when you decide to take out an investment loan. Generally, there are two kinds of online calculator you can use, a borrowing power calculator and a home loan calculator.
Your borrowing capacity is an important consideration when applying for an investment home loan. You can use our borrowing power calculator to see what your borrowing capacity is, based upon your income and expenses.
When calculating your mortgage repayments, you can use a home loan calculator. The result of this calculator will be based on your loan amount, interest rate, and loan term. Take note that these calculators should only be treated as a guide. It is still best to consult with a lending specialist.
Refinancing Your Investment Property
Refinancing is when you take out a new loan and use it to pay off your old investment property loan. Reasons for refinancing may include consolidating a number of debts into one, obtaining a lower interest rate to save money, or borrowing more to refurbish a property or buy another investment property.
When choosing a new lender to refinance your mortgage, you need to find out who offers the features you want with the most competitive rate, and then compare it to your current mortgage. It is important to shop around and consider online lenders, because they often have the lowest rates.
How to Invest In Property with a Modest Income
Investing in property can be a good way to make money. But if you don't have a high salary, you could face a challenge getting an investment property loan approved. Here are some tips on how to buy an investment property on a more modest income:
- Pay off your debts: The less liabilities you have, the more inclined a lender will be to approve your loan.
- Save for the deposit: The more money you have saved for the deposit, the better your chance of getting a loan approved.
- Consider investing with someone else: If you can’t afford the deposit, you can opt for a joint investment. Keep in mind that investing in property like this with a modest income is possible if you have the discipline to keep a tight rein on your spending and partner with a trusted friend or family member.