How to buy an investment property interstate

Most property investors usually start with a property in an area they know well, or at least in the city in which they live. But buying a property investment in another state is also a smart strategic move – and if prices in your own city have reached their zenith, it can be more affordable.            

Peter Bushby, the president of the Real Estate Institute of Australia (REIA), says the advantage of buying interstate is that you can benefit from the different peaks and troughs of the property cycle. If you do your homework, you could buy at the bottom of the cycle in an up-and-coming area interstate and enjoy strong capital gains in the near future.

“In addition, diversification is a useful strategy in any investment portfolio,” Bushby adds.

However, doing your homework is key. “No matter where you’re buying, you really need to investigate the market you’re looking at and understand the opportunities,” Bushby says. “Where there’s opportunity, there is also the potential for risk and you need to be mindful of that.”

Where do you start?

Your investment strategy should be based on in-depth research and analysis of the interstate area or suburb you have earmarked for your next investment property.

Say, for example, you have set your sights on the outer Melbourne suburb of Lynbrook – identified by property market expert John Lindeman of Property Power Partners as being among the top 10 boom suburbs of 2014. Begin by researching the suburb online to gain an understanding of the local economy, the area’s rental demand and potential for capital gains.

“Look at economic studies of the region you are researching,” Bushby says. “Is there population growth that would fuel demand for rental properties? Are there any threats that would inhibit rental demand? For example, a large employer potentially shutting its doors?”

Bushby also recommends visiting the area before making an investment, to do some on-the-ground research and meet with local agents. “It’s not your patch so you may not understand it as well as your own city or state,” he says. “It’s useful to visit the area if you haven’t been there before.”

Property management from afar

Another important aspect of buying an investment property interstate is that you won’t be handily nearby for regular inspections or if a tap is leaking. You must, therefore, find the right estate agent to manage the property and factor in travel costs for inspections or any issues that may arise.

“You need to have skilled people there to manage your property and you need good reliable support in the area for any maintenance that will be required. You should factor that into the cost of the investment,” Bushby says.

“The underlying theme here is to do your homework,” he adds. “Do as much risk assessment as you can before stepping into anything like this.”

For more tips on how to get started in property investment or to find a home loan, check out the RateCity guides and news pages.

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Learn more about home loans

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

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What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor.