This is a step-by-step guide on buying an investment property in Australia.
Property investment can be an excellent way to build wealth and generate passive income, but it’s crucial to understand the process before jumping in. With the right knowledge and guidance, you can navigate the Australian property market with confidence and make smart investment decisions that will set you up for financial success.
Whether you’re a seasoned investor or a first-time buyer, this blog will provide you with the essential steps and tips you need to know to make a successful property investment in Australia. So, let’s get started!
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How to buy an investment property in 5 easy steps
Step one: determine what you can afford
The first step is to determine your budget by creating a detailed analysis of your finances. This will help you understand how much you can comfortably afford to repay while factoring in your everyday living expenses, existing debts, and other financial commitments. It’s important to have a realistic estimate of both income and expenses for your future property investment.
To get an estimate of your borrowing power, try out moneysmart.gov.au’s mortgage calculator based on your expected rental income and lifestyle. Alternatively engage a qualified mortgage broker who can assist with your borrowing capacity.
Step two: save up for a deposit
The next step in our property purchasing guide is to determine the amount you need to save for a deposit. As a general rule, a 20% deposit of the purchase price is required to avoid paying lender’s mortgage insurance (LMI). Keep in mind to also consider other significant upfront costs, such as stamp duty and legal fees, when preparing your budget. If you don’t have a 20% deposit saved up, there are alternatives to consider, such as leveraging equity in an existing property (if you own one) or paying LMI, which can help you to purchase a property sooner.
What is equity?
The amount of equity you have in your home is determined by the difference between its market value (how much you can sell it for) and the remaining balance of your mortgage. If you’ve been a homeowner for some time, it’s likely that you’ve accumulated a significant amount of equity in your property, which can be a valuable asset in your property investment journey. Generally lenders will allow you to access up to 80% of the equity in your home, less any existing mortgage still owed (subject to their terms and conditions).
How do I calculate my equity?
To calculate the equity in your home loan, you need to subtract the outstanding loan balance from your property’s current market value. For instance, if your home has a market value of $700,000 and you still owe $300,000 on your mortgage, your total home equity would be $400,000.
Just bear in mind the usable equity as determined by most banks will be a maximum of 80% of your home’s value. So in this example that would be 80% of $700,000 which is $560,000, subtract the $300,000 you still owe on your mortgage and that gives you a usable equity of $260,000.
Step three: find the right loan for you
When purchasing an investment property, it’s important to choose the right loan to suit your investment strategy. Investor loans differ from owner-occupier loans, with different rates, terms, and conditions. One important consideration is whether to opt for a fixed-rate or variable-rate loan.
Fixed-rate loans offer repayment stability and certainty over your repayments, while variable-rate loans can provide more flexibility and the ability to make additional payments or access features such as redraw or offset accounts.
Another consideration is whether to opt for a principal and interest loan, which can help pay down your loan faster and reduce the amount of interest paid overall or an interest-only loan.
With an interest-only loan, your monthly repayments will be lower for a set period, but you will only be paying off the interest and not the principal loan amount. Some investors choose this option if they are using a capital growth strategy and want to reduce expenses while waiting for property prices to rise.
Ultimately, the type of loan you choose will depend on your investment strategy and goals. It’s important to carefully consider your options and seek professional advice if needed.
We recommend that you engage with a qualified mortgage broker who can sort out what appropriate loan is suitable for you.
Step 4: find the perfect property
Buying an investment property requires a more systematic and rational approach than buying a home to live in, focusing on expected returns rather than personal tastes and preferences.
To choose the right property for your needs, it’s important to research up-to-date market data and trends using resources such as RealEstate.com.au and Domain.com.au. Consider growth areas, future developments, lifestyle amenities, and proximity to schools, transport, and hospitals. Once you’ve narrowed down your search to a specific location, compare different properties in the area to determine rental prices and potential rental yield.
The type of property you choose will also have an impact on your rental income and yield, and your budget will play a big part in determining what you can afford. Consider whether apartments/units, houses, or building your own property is the best option for your investment strategy and financial situation.
If time is an issue, you may want to engage a qualified buyer’s agent or real estate agent in the area you are looking to help with your search for the right property for you.
Step 5: Do the numbers
It’s vital that you do your numbers on a property and factor in costs including:
- Purchase Price
- Stamp Duty
- Mortgage Transfer & Other Government Charges
- Legal Fees
- Borrowing Costs including upfront and ongoing
- Rental Income & allow for vacancy periods
- Property management fees
- Landlord insurance
- Depreciation costs
- Maintenance and any renovation costs
- Water, government rates and body corporate levies (if applicable).
- Land tax payable.
- Any tax benefits you may be entitled to to help minimise your out-of-pocket expenses.
Our top 10 property investment tips
- Be clear on your goals
- Do your research and do the maths
- Don’t set and forget
- Get professional help
- Don’t underestimate ongoing costs
- Buy in a growth area
- Be realistic about your investment goals
- Buy with your head, not your heart
- Get a building inspection.
Aspiri can help you with the numbers
We can put together an indicative cash flow for a property to see if it fits into your lifestyle. We cannot recommend a specific property as you will need to engage another expert in that field whether it be a real estate agent or buyer’s agent to source a particular property. We also recommend you engage with a tax advisor to determine the best structure to hold that property as different structures will have different benefits or disadvantages which need to be explored.
As financial advisors, we allow you to concentrate on the more enjoyable aspects of life. You want your money to grow over time, so you can use it when you’re no longer working, or so it can supplement your income to help keep pace with your current lifestyle.
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So contact us today, and we can help you live the life you aspire to
Aspiri Financial Services (ABN: 37 626 759 340) (“Aspiri”) holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (AFSL No: 300878).
This material is issued by Aspiri and is general in nature, and does not constitute advice. This information does not take into account your personal objectives, circumstances, financial situation or needs. We strongly recommend you seek independent professional advice, including but not limited to speaking to a licensed financial planner and/or tax advisor, before opening an account with us and/or acquiring our services/products.
Aspiri does not give any warranty as to the accuracy, reliability or completeness of information, which is contained herein, except insofar as liability cannot be excluded. Past performance is not a reliable indicator of future performance.
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