Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
We as Australians love property. Whether it's watching a renovation show, fixing up a kitchen, buying a first home or investing in a second, the thirst for an abode and a slice of land is unquenchable.
Buying your first home is a massive achievement, and chances are a few years down the line, you may want to start looking at a second property, using your first as an investment. Whether you’ve grown in family size, acquired more dogs, want a taste of the country life or you’ve simply moved on from your first home, turning it into a rental property could be a favourable investment option. But what are the things you should consider?
While you may already have home insurance on the property, when a tenant moves in, it could be wise to consider landlord insurance.
Landlord insurance covers a variety of risks including: theft or burglary by tenants, vandalism/malicious damage, loss of rent due to tenant default/break lease, and legal expenses that may be incurred while evicting a tenant.
Some policies could also cross over into home insurance items such as storm, flood or fire damage. Consult the product disclosure statement (PDS) of the policy you are thinking of buying to see what’s covered.
This is the fun part, but also really important, and potentially difficult.
Research the market: Australia - particularly capital cities - can be competitive and it can be difficult to have your investment property stand out from the rest. That’s why it is important to price it well - not too high and not too low - to attract potential tenants.
Rental yield calculations: A good rule of thumb can be to look at the rental yield in your suburb and go from that. For example, rental yield may be 5.2% on the year, which would mean a $300,000 property would rent for $300 a week. Other areas may be higher or lower, so it’s important to do your research.
By the time you take out insurances, any body corporate fees, rates and more, weekly profit from rent could be surprisingly low if you don’t charge enough, so it’s important to research the market.
This can potentially be as difficult as finding 'the one' through a dating app, but the message here is to do your research.
A handy first step is to look in the local area for agents and research them just like you would when looking for a place. A good way to gather information on an agent is to go to any open homes the agent has to see how they operate and present themselves. This enables you to interact with the agent and get to know them. From there, you can usually find online their past performance data, as well as the fees they charge for leasing and managing your property.
Buying a second property is no mean feat, and there are a few tax items to consider before jumping in when it comes time to convert your first home into an investment property.
Tax deductions: As your investment property is now no longer your principal place of residence (PPOR), you may be able to claim deductions on some of the interest paid as part of the loan repayments. Another deduction available is depreciation, calculated at a rate of 2.5% per year in the 40 years following construction, and could apply to extensions and renovations as well.
Capital Gains Tax: Your PPOR is generally exempt from capital gains tax but your investment property may be subject to it. However, this usually only happens when it comes time to sell.
Property tax law can get pretty complicated, so it’s best to seek out the advice of an accountant or tax professional here in consideration of your personal requirements and financial goals.
Negative gearing is simply a situation where the gross income generated by the property is less than the cost of ownership including mortgage repayments.
If your property is negatively geared, in Australia, you can potentially claim the loss against your regular income, thereby reducing your taxable income and tax payable.
Positive gearing means the opposite - you are making a profit on the property after expenses. Neither option is better or worse than the other - it all comes down to your personal financial situation and goals.
One of the biggest considerations to take into account when making your home an investment property is your mortgage.
When your home shifts from being owner-occupied to an investment property, you will have to refinance your mortgage into an investment loan.
Refinancing to an investment loan may attract a higher home loan rate. One benefit of investment loans, as mentioned earlier, is that you may be able to claim the interest paid as a deduction on your taxable income. Refinancing is easy, and there are many competitive rates out there, such as investment property loans from loans.com.au.
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You want to make a good first impression with your prospective tenants and trash, dirty walls and unkempt open areas will not do you any good. Keep your property clean. You can add potted plants to make the area look homely and inviting. Also, you can remind your existing tenants to maintain the cleanliness of the place.
Investment properties cost a lot of money so it’s only right to ensure that it is in tip-top shape. Regularly check your property for things that need to be repaired. The simple issues, when taken for granted, can lead to bigger problems that may be more difficult to resolve. Also, maintaining your property will protect the long-term capital value.
Prospective tenants will likely compare properties and one of the things that they will consider is the rent, so make sure you know how much other landlords are charging for similar properties.
Don’t think that your existing tenants will automatically renew their leasing contract. It’s essential to find out early so you can advertise the property as soon as possible. It’s a waste of potential income if you advertise too late so your property is vacant for a period of time.
Take care of your tenants and make them feel welcome. When you have a good relationship with them, they may be more comfortable informing you of any issues in the property, resulting in longer occupancy.
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.