Investment Property Home Loan
Be smart, secure your future
At a glance
If you’re looking for a stable and secure investment, property is a solid option. Property is far less volatile than other investment strategies. An investment property has the potential to deliver consistent rental returns for years to come. While you may start out with a single property, careful consideration and management of your investments could see you grow this to a full and profitable portfolio with the help of an experienced home loan broker.
When purchasing an investment property, you need to think tactically about where you will buy and the type of person who generally resides in this area. Doing your research and having a clear understanding of the market and the areas where property is most likely to increase in value is essential. When considering your budget and return on investment, it’s not just about your rental returns, you need to factor in ongoing costs also.
First Time Property Investor Checklist
Investing in residential real estate, is likely to be a lengthy process and one that usually involves a plan for the long term.
Before applying for your investment home loan, ensure you have considered what is required before making the big purchase, we’ve outlined steps you need to take in that process.
Make the commitment
A property investment must be a long term commitment in order for it to be worthwhile, so the very first step is to ‘do the numbers’ in order to evaluate your budget, potential constraints and future financial and personal obligations including the potential impact on family members.
Consider your future as far ahead as you can. You need to assess your ability to maintain or improve personal income as well as your commitment and ongoing financial capability to continue to service the financial impact of the investment for a minimum of five to ten years, as that’s what generally brings premium results.
You need to also make the commitment to ‘manage’ the investment – even if you outsource the day-to-day tasks involved including locating suitable tenants, collecting rents, paying relevant costs in rates and taxes as well as ensuring that the property’s repairs and maintenance are kept up to date.
Obtain Professional advice
You now need to obtain professional advice. An investment in real estate is likely to be significant in relation to your current financial position.
If you have already discussed the investment with a licensed financial planner or investment adviser and residential real estate is considered the most appropriate in your current circumstances, you will have considered aspects including rental return, maximum capital growth and/or tax effectiveness.
You next need to locate a suitable property. There are buyers agents now available who can assist you in this process – potentially saving you money by disregarding inappropriate properties and concentrating on those that are more likely to deliver the highest return and capital increase to you over time.
Following that, unless you have cash or other investments that can be converted to cash to make your property investment, the next step is to contact a mortgage broker to help you to secure finance to enable purchase.
This will give you the opportunity to ask the broker as many questions needed to alleviate any uncertainty you may have about securing that finance.
Assistance from relatives & friends
Talking to friends, family and acquaintances who have already made such an investment, or are currently considering one, can help your awareness of stumbling blocks and potential issues that you might otherwise miss.
While any issues you face may seem new, it can help to bounce these off a trusted friend or relative who has been there before.
Collate your information
In order to apply for finance, you will need proof of your current income, employment and your assets as well as all liabilities including debts, loans, rental payment, outstanding credit card obligations and any other due payments. Collate these and also any paperwork that helps support your personal position.
Before applying for a investment property loan, minimise your current debt load, and if possible, reduce the limit on, or cancel any credit cards you are not using, as this is perceived by lenders as potential for debt.
It is strongly recommended that you have a fully assessed pre-approval before you start your search. This will allow you to know what your financial limits are so that you can make an offer when you’ve found a property you like.
Other things to consider
An investment property purchase should not be an emotional decision. It is a business decision. If the property isn’t as clean as you would like, don’t assume that it hasn’t been maintained unless there are other clues to demonstrate that.
Cleaning and even simple maintenance tasks are things you can do yourself or have done for you that you can include in your budget.
Consider choosing a property based on whether you feel like you could live in it. While it’s still a business decision, you also have to adopt the mindset that you could be selling to an owner/occupier down the track, which could be an emotional purchase for the buyer.
If however you plan to rent the property, your decision should be based on what would appeal to the type of individual who wants to reside in the area.
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Frequently asked questions
If you earn less from an investment property than it’s costing you, you’re said to be negatively geared. The motivation to be negatively geared is that it reduces your taxable income and you accept a short-term loss in the hope of a capital gain later.
The cost of having a professional manage your rental property is between seven and ten per cent of your total rental income each week. So, for a property with an average rental return of $550 per week, you would need to pay the agent between $38.50 and $55 per week, which amounts to between $2,002 and $2,860 per year. If you compare this to the time commitment and potential costs you could face if you were to represent yourself at the tribunal, this weekly management fee is marginal.
Unlike a owner-occupied home loan, the costs associated with an investment loan are tax deductible (eg interest, fees, repairs, rates, depreciation, etc). However, be aware that any rental income will generally increase your taxable income. Another key difference is that any appreciation in the value of an investment property (capital gains) is taxed. Refer to your accountant for full details
As the owner of an investment property, the ongoing cost you will need to pay could include council rates, water rates, insurance, body corporate fees, land tax, property management fees, repairs and maintenance costs. Keep in mind, all costs associated with a investment property, could be claimed as tax deduction when completing your tax return. Seeking professional from a qualified accountant is recommended.
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James Sylvester commenced Mortgage Brokering in 2009 and launched the Mortgage Broker Brisbane business "Your Home Loan Consultant" in February 2012.
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