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How to invest in real estate in Australia

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Smart Booster Investor Bundle

Bundle your home loan and investment. Save thousands when you bundle your investment loan and home loan with loans.com.au, with rates starting at 2.24%+ for both.

  • 2.24%
    discount var rate p.a.+
  • 2.96%
    comparison rate p.a.*

Property investing is a proven strategy to build wealth. However it does come with risk.

Buying an investment property is a popular choice of investment for many Australians. Compared to other forms of investment like shares, bonds and ETFs - investing in property is easy to understand. Plus, home loan rates are at record lows, and you can use your home's equity to fund your property investment.

Some benefits of purchasing an investment property include:

Before you get started on your property investment journey, here are some important tips.

Understand home loans

If you are looking to invest in a property for the first time, you may already be living in a house you own. This is called an owner-occupier home loan.

When you invest in a property, you will need a different loan with different features. That’s because the Australian Taxation office (ATO) has a different set of rules for an asset such as property. If you aren’t living in your investment property, you will take out an investment home loan.

If you’re planning to purchase an investment property to rent out to tenants, no matter whether it’s your first investment property or your next, we can help.

An investment home loan is a home loan for people looking to buy a property with the intention of renting it out and profiting through a rise in the property’s value. Home loans for an investment property differ from home loans used to buy a house or unit to live in – known as ‘owner-occupier’ home loans. Compared to owner-occupier home loans, investment home loans often have higher interest rates and may have stricter eligibility requirements.

Interest only investment loans

Unlike most home loans where each loan repayment consists of both interest and principal (meaning your loan balance reduces with each payment), on an interest only loan you only need to pay the interest calculated on your loan each month. This is particularly helpful to investors who wish to pay the smallest repayment amount.

At loans.com.au , you can choose up to a 5 year loan term for interest only, and once this expires your loan will revert to a principal and interest loan. Your repayments will increase after this period in order reduce your loan down by the end of the term.

The main aim of the investment game is to purchase a property that will increase in value over time, and hopefully one day sell for a profit while gathering rental income in the meantime. This is called capital gain.

The idea with interest-only investment loans is that when an investor sells the property, they can use the money to pay off the principal while still making a profit.

Interest-only home loans can also enable investors to secure a property while minimising their repayments. This could be especially useful when trying to find tenants and to minimise other startup costs.

The other advantage is at tax time. During the interest only period,  because you’re not paying off any of the principal on the property, the entire interest-only portion can be claimed as a deduction against your taxable income.

Decide on an investment strategy

There are three main strategies associated with property investment. The main goal is to generate wealth i.e. make money.

This is traditionally done one of two ways.

Capital gains

This strategy is pretty self explanatory, buy a property, wait for the value to increase and then sell.

Most investors using this method will aim to use rent to generate enough income to cover the mortgage repayments while you wait for the value to increase.

This increase in value is also called capital growth. Capital growth will be dictated by a number of factors such as the suburb of the property, the supply and demand of the property type and the age of the property.

Renovate

If you have time, a bit of disposable cash and maybe even some skills in the manual arts, you can use the strategy of buying a property and renovating key features to add value and then selling.

Renovating areas like the bathrooms, kitchen or adding a deck can help increase the value of a home. Once you have made these improvements you can put the property back on the market to make a profit.

Also read: Pros and Cons of home renovations

Research

Your investment strategy will also be determined by the research you do on where you want to buy and the property type.

Make sure you research:

Property type

Are you looking for a unit, townhouse or house and land? Research what other property types are in the area. A beachside town with limited waterfront houses, might mean a house and land will always be in high demand. On the contrary, a suburb with an oversupply of units might make it harder to sell down the track.

Also research the age of the property. Older homes may require more upkeep and maintenance which ultimately is going to cost you, as the owner, more money.

If it has any key features such as a pool, large yard or garden, these will also require you to maintain. These features can add time and money to your management of the property, but can also be great selling points down the track.

Suburb

The area of the property can often influence the value more than the property itself. Suburbs with access to a capital city, public transport, schools, parks, shops and nightlife can all influence the value of a property. These factors will also influence what kind of tenants you can expect. A CBD unit as an investment may attract young professionals. A house and land in a leafy suburb may attract a family. Or a townhouse near the coast could attract retirees.

These factors are all important to influence your investment decisions.

Budget

Ultimately, your strategy will be influenced by what you can afford. The best way to figure out your borrowing capacity is to chat to a lending specialist like loans.com.au to get pre-approval.

Home loan pre-approval (also known as conditional approval or mortgage pre-approval) is an initial assessment from a lender where they agree, in principle only, to lend you a certain amount of money to buy a property.

A mortgage pre-approval essentially serves two purposes:

  • It establishes your financial position with the lender and yourself 
  • It indicates just how much a lender will lend you, and what type of house you can afford to buy 

Use our borrowing power calculator to estimate how much you can afford

Calculate borrowing power

Plan your property management

Before you buy an investment property, you need to decide how you are going to manage it. Managing a property by yourself can be a tedious task.

Many investors employ a property manager to take care of day-to-day communication and management of tenants and advertising.

There’s a huge range of tasks a property manager can perform in any given day, and they can end up being quite busy when dealing with multiple clients.

Key responsibilities of a property manager are:

  • Advertising your property on rental websites and hosting inspections
  • Finding and screening potential new tenants (and pets if applicable)
  • Organising the collection of rent and ensuring the correct amount is being paid, on time
  • Preparing and finalising entry condition reports
  • Creating and ensuring the signing of the lease
  • Handling all the nitty-gritty paperwork
  • Managing day-to-day interactions with tenants
  • Inspecting the property on a regular basis
  • Responding to requests for repairs and maintenance and arranging tradespeople
  • Handling tenant turnover

Without a property manager you will be covering these tasks on your own. This is ultimately another expense you plan for should you decide to employ a property manager.

Tax on your investment property

Perhaps the most complicated part of owning an investment property, is understanding the tax implications. There are two main strategies when it comes to taxable income on an investment property, known as positive and negative gearing.

Positive gearing

Positive gearing occurs when the property is receiving more rental income from tenants than it costs to own and fund the property. This means you can profit from the investment from day one. 

As an example, let's say that your investment property is earning $20,000 a year from rent, and your expenses (loan repayments, body corporate fees, maintenance, etc.) are only $15,000. You'll have positive annual cash-flow of $5,000.

Obviously, the benefit of a positively geared property is the income. You don't need to shell out any money from your salary for the expenses, and you can put your money elsewhere.

You're earning money from positive gearing, so this means you will pay more tax. The higher the income you generate, the higher your tax obligations will be.

However, many positively geared properties are located in outer or regional areas, so your property may experience slower capital growth.

Negative gearing

Negative gearing means that the cost of owning an investment property outweighs the rental income it generates. Although you are making a loss, these losses are tax deductible and result in tax savings overall. 

As an example, let's assume that your rental property earns $20,000 in one year and the expenses of owning the property (loan repayments, body corporate fees, maintenance, etc.) are $25,000. You will have a loss of $5,000 which you can claim as a tax deduction.

The biggest benefit of a negatively-geared property is the ability to claim tax deductions and reduce your taxable income. 

Additionally, a negatively geared property investment may appreciate in value over time. This capital gain in the value of the home can offset your other losses. 

There is also a risk involved with negative gearing because you are losing money. You will always need to budget for an ongoing shortfall and prepare for the losses.

Read more: Negative and positive gearing pros and cons

To start on your investment property journey, chat to a friendly lending specialist today.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.