Property investment myths

Just under 8 percent of the Australian population owns an investment property, according to the Australian taxation Office, although a much higher proportion considers it – or ends up selling up and giving up on the dream of being a landlord.

“Fifty percent of people who get into property investment, sell up within the first five years – either because they bought the wrong property or because they bought at the wrong time,” says property investment expert Michael Yardney, CEO of Metropole Property Strategists.

Sound daunting? If you’re interesting in becoming a successful property investor, it’s important to keep in mind a handful of common property investment myths.

1. Investing in property is easy
“Property investment may be simple, but it’s not easy,” says Yardney. “The majority of people who get into property investment fail because they do not achieve financial independence – 90 percent of property investors never get past their first or second property.”

So while it’s not easy, investing in property can be simple if you stick to time-proven rules, according to Yardney – including buying property below its intrinsic value and investing in areas with a history of strong capital gains. All this requires research and experience.

2. Property always increases in value
Would-be property investors assume they can’t go wrong because property prices will always go up. Not so, Yardney says. “This is true for well-located property, but there are areas where you can lose money. For example at Docklands in Melbourne, property prices have probably not increased in value at all in 10 years because of an oversupply.”

Once again, research and understanding the market will help you avoid any losses. “In every 10-year period, there’s usually a couple of good years and a couple of bad years,” Yardney adds.

3. It’s all about timing
Yes, timing is important but, as Yardney says: “It’s hard to read the cycle if you’re a beginner.”

Success in property investment comes down to your way of thinking and to having a strategy in place – and sticking to it, according to Yardney. “Some investors do well in good times and in difficult times, while others do poorly in good times and worse in bad times. Timing is not as important as people think. I believe a lot of success in business and entrepreneurialism has to do with the way you think.”

If that doesn’t come easily to you, Yardney suggests seeking professional advice. It’s also important to have a cash reserve to ride out any tough patches in the market.

4. Certain suburbs guarantee investment success
Location, location, location: it’s the catch cry of real estate agents all around the world. But it’s not as simple as choosing the best suburbs in which to buy a property investment, Yardney says.

“While some suburbs outperform others, within each suburb there are areas you should invest in and areas you shouldn’t,” he says. For better rental return as well as capital gains in the long term, he suggests avoiding main roads and secondary streets, and looking for streets with character, lots of trees, views and proximity to amenities.

For more news and information about investing in property, check out RateCity’s latest articles here.

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Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

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 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 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 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 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 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 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 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.

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.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.