Property investment 101: how to get started

Property investment 101: how to get started

In a country where property prices are a common topic of conversation, property investment is bound to be a widespread aspiration. Owning an investment property, done right, is a proven way to build wealth and ensure a more comfortable retirement.

However, only 50 percent of people who enter property investment do so successfully, according to property investment expert Michael Yardney, CEO of Metropole Property Strategists. The other 50 percent sell up within the first five years and give up on their property dreams.

So how do you get started to ensure you’re in the successful 50 percent?

Do your sums

Financial advisor Greg Pride of Centric Wealth says first up you have to determine whether you can afford to service the extra mortgage on the investment property. “The first step is, what is your income? The second step it to deduct your expenses, which leaves you with your savings capacity,” he says.

“Next, divide that sum by three – one third for you to spend, one third for a medium-term opportunity such as managed funds, and the final one third for a long-term opportunity such as property investment. If you don’t have a savings capacity, there’s no point getting started because you won’t be able to fund it.”

Before you buy your first property investment, calculate how much it will cost you each month – include the cost of renovations if necessary, repairs and maintenance, insurance, rates and property management costs.

Set clear goals

Are you interested in an investment property as a way of earning extra income from the rent or are you after maximum capital gains? Is it part of your retirement plan or do you have five-year or 10-year goals? Being clear on your goals will determine your investment strategy.

According to Yellow Brick Road founder Mark Bouris: “Be clear about what you want to achieve and in what time frames,” he wrote in an article for Fairfax. “Before you buy a property, you should decide on your earning goals. Will this be a negatively or positively geared investment? Will you invest in renovations to increase your rental return?”

Do your research

Before you buy, research rents and vacancy rates in different suburbs. Also keep in mind that within each suburb, there are certain areas or streets that may command higher rents and capital gains down the track. Yardney suggests avoiding main roads and secondary streets, and looking for streets with character, lots of trees, views and proximity to amenities to tick both the rental box and capital gains.

If you are buying more than one investment property, look to different areas to diversify your portfolio and minimise risk.

Get the right loan

Which home loan features will be of most benefit to your investment strategy? Take the time to research and compare different home loans, and consider whether you will opt for a fixed interest rate or variable, or a mixture of the two.

Who will manage the property?

Some property investors manage their own properties, but this can be time-consuming and dangerous if you are across tenant law or organized when it comes to collecting rent. A rental agent will provide ease of mind, but also take a cut in the rent. Once again, do your homework before you make a decision.

Have back-up funds

Property investment is like owning a business. Having a cash reserve to fall back on in tough times will help you hang on to your property and allow you to attend to any unexpected repairs or even hold out for a more suitable tenant.

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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.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

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.

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 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 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 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 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.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out.