How to minimise risk when buying an investment property

How to minimise risk when buying an investment property

With the property market across the country remaining strong and rental prices in metropolitan areas rising steadily, becoming a property investor is an increasingly attractive option for many Australians.

Like any investment, however, buying an investment property entails risk. If you are contemplating acquiring another home loan to finance the purchase of an investment property, here are some tips to minimise the risk.

Think long term
“You always have to buy a property thinking you’ll hold on to it for eight to 10 years. If you don’t want to do that, trading shares might be a better investment for you,” says Toby Primrose, director of Australian Property Investor, a company that helps investors manage their property portfolios.

Once you factor in taxes, legal fees and other costs associated with selling, you will be slugged with a bill of approximately $30,000 on a $400,000 property, according to Primrose. If you plan to sell too soon after you buy, you may even lose money on the sale once you subtract these costs.

Property prices have historically risen in Australia, but it doesn’t happen overnight. As Primrose writes on his company website: “The only question you need to ask as an investor is how long I will have to wait to double my money; the answer is usually seven to nine years.”

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Do your homework

Buying a property is an expensive enterprise, therefore doing your homework is crucial. Research capital growth trends, rental yields and vacancy rates in your chosen suburbs to ensure you are buying in the best possible ­– and least risky – area. Apply the same diligence in researching and comparing home loans to get the most suitable option for your needs, factoring in other financial commitments.

Don’t be seduced by the ‘flipping’ phenomenon
Spurred on by TV programs such as Flip This House, a growing number of people think they can buy a run-down or off-the-plan property and sell it quickly for a tidy profit. That’s one of the riskiest things a property investor can do, says Primrose, and he warns his clients against it – particularly when it comes to buying off the plan. “It takes five to seven years just to break even when you buy off the plan,” he says.

Primrose says the most effective way to minimise risk is to avoid trying to identify the next hot spot or “reading” the market. Even the experts can get it wrong.

Once you buy, be smart
One of the biggest concerns of any property investor is the risk of not being able to rent their property easily and enduring periods of no rental income. “There are two reasons why a property remains vacant,” says Primrose. “It’s either in a state of disrepair and therefore unattractive to tenants, or the rent is too expensive.”

His advice? Be diligent about the property’s upkeep and do your homework on the going rental rates in your area. Don’t rely on the seller’s estimates of what rent the property may fetch.

If you are buying an apartment, look at what other apartments in the block are commanding in rent, Primrose advises. For houses, check rental rates with local real estate agents or look online.

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Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

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.

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 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.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

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 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 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 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.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.