Buying an investment property: a step-by-step guide

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.