What are the benefits of property investment?
Buying an investment property is a clever way to begin your investment journey. It also comes with some great benefits.
- Investors can earn rental income: By renting out your investment property, you can earn a passive income that can help cover the costs that are involved with running and managing the property.
- There are tax benefits for property investors: The cost of running and managing your property can be offset by your income, which means you can pay less tax. And you can also claim tax if your property is negatively geared.
- You can build wealth over time: Capital growth is when your property’s value increases over time. By buying an investment property with good growth potential, you watch the value grow over the years, then sell the home at a later point – usually at a higher price than when you initially bought it.
How to buy your investment property
Investor home loans
Taking out an investment home loan can help you buy an investment property. The difference between this loan and your standard one is that investment loans have a higher interest rate. This is because property investment can be a risky venture. It’s a physical asset that can be vulnerable to the elements, or a tenant might miss rent. But with the right strategy and plan of attack, you can reduce risk and be prepared.
Before applying for a loan, it’s important to understand your borrowing power. This can help lenders work out how much to loan you and how financially committed you are to repaying them. You also need to have a deposit of at least 20 per cent of the property price to avoid paying Lenders Mortgage Insurance (LMI).
Usable equity
For new investors who already own a car or home, you can tap into your existing equity to help buy an investment property. Equity is the difference between the value of your big purchase (your car or home) and the amount you still need to pay back for it. With every repayment you make on your loan, the more equity you’ll have to help you buy an investment property.
Cash gifts
A member of your family might give you a cash gift for your investment property deposit. Most lenders will ask for a gift letter – evidence that explains where the money came from and how it’ll be used. But even though you got help from your family, you still need to show the lender you can pay back your home loan.
Where should you buy an investment property?
When it comes to the location of your investment property, there are a few things you’ll need to think about.
- Your budget: Try to buy an investment home within your budget. This means you’ll have enough funds to cover any upfront costs you’ll encounter, and you can be sure to meet future repayments.
- Local essentials: Consider how close your property is to public amenities, as your home’s proximity to these spaces can influence the tenants you get.
- Growth potential: Use market data and trends to work out if your area has good growth potential. For example, is there a big shopping centre development in progress? Or new public transport coming?
What type of property should you invest in?
- Apartments: This property type tends to be one of the cheaper investment options. They can have fewer managerial responsibilities and lower maintenance costs too, as these are covered by body corporate fees.
- House: Investing in a standalone house can have a higher long-term capital growth and appreciation. You can also increase your home’s value with a renovation, such as adding a brand-new stovetop to the kitchen.
- Land: Investing in land doesn’t need much involvement from you at all. You can hold onto the land and wait for a spike in value before selling it. Or you can subdivide the land and sell it as multiple blocks.
What else should you think about?
The features of your property can appeal to certain renters and impact how much you can charge. For example, a house with a large backyard might appeal to a family. Or a single-bedroom apartment might interest someone who just moved out of home.
Consider these features when deciding what property to buy – it can help your investment home go a long way:
- The number of bedrooms and bathrooms
- Backyard and outdoor space
- Garage and any external lock-up facilities
- Single, double or triple storeys
- Maintenance of property
- Age of property
- Strata fees and body corporate
How can investors manage their property?
Property investment is more than buying a property – you or a real estate agent will need to manage it too. How will you promote the property? Where will you find tenants? You’ll also need to think about rent collection, getting property reports and managing complaints.
Taking out landlord insurance is something you might consider too. It can protect your investment property from certain scenarios, like missed rent. Most insurance policies have add-ons for more complex situations, like a flood or fire.
Managing your investment loan is part of managing your investment property. How can you be clever about repayments? Can you set up automated payments? Or can you make the most of your bank’s app? For example, The Boost feature is a great way to help you pay off your home loan faster through everyday purchases.