What To Consider When Investing in Property
Your Current Finances
Before applying for an investment property mortgage, evaluate your current financial standing. Start by reviewing your income, expenses, and outstanding debts. This helps you understand your capacity to meet loan repayments and demonstrates financial responsibility to lenders.
Key steps include:
- Maintaining a good credit score
- Ensuring your debt-to-income ratio is within acceptable limits
- Having an emergency fund to cover unexpected costs
Related:
How Much Will You Need?
Understanding the total cost of purchasing an investment property is crucial. Apart from the purchase price, there are additional costs to consider, such as:
- Loan-related fees
- Stamp duty
- Legal fees and inspections
Using online tools like the Cost of Buying Property Calculator can help you estimate the total amount needed for your investment.
What Can You Afford to Borrow?
Your borrowing capacity determines how much you can afford to spend on an investment property. Lenders assess your financial information and repayment ability to calculate how much they’re willing to lend.
To estimate your borrowing potential, you can use the Borrowing Capacity Calculator.
Do You Need a Cash Deposit?
Most lenders require a deposit of at least 20% to avoid lender’s mortgage insurance (LMI). However, there are loan options available for smaller deposits, although they may come with higher interest rates or additional fees.
Plan for the Future
Think long-term when making a real estate investment. Whether you intend to expand your portfolio, refinance, or sell, your strategy should align with your goals.
Consider the following:
- How will interest rate fluctuations affect your repayments?
- Is your rental income enough to cover ongoing costs?
- Are there plans for nearby developments that could impact the property’s value?
How to Decide Which Property to Invest In
Affordability
Affordability includes more than just the purchase price—it also covers ongoing costs such as loan repayments, insurance, and repairs.
Tenant Appeal
To increase your returns, your property must appeal to reliable tenants. Here’s how to enhance tenant appeal:
- Property Upgrades: Fresh paint, modern light fixtures, updated kitchen and bathroom fittings.
- Seasonal Enhancements: Consider adding or improving insulation for colder months.
- Sustainable Features: Install energy-efficient features such as LED lights and smart thermostats.
- Fireplace Safety: Hire a chimney sweep to avoid safety hazards.
- Flooring: Replace worn-out carpets for better acoustics and insulation.
- Outdoor Areas: Maintain gardens, repair fences, and ensure balconies are inviting.
Investment Property Costs
Borrowing Costs
These include:
- Loan application and valuation fees
- Lender’s mortgage insurance (if applicable)
- Interest rates on real estate investment loans
For an estimate of your borrowing potential, use the Borrowing Capacity Calculator.
Stamp Duty
To calculate your stamp duty, use the Stamp Duty Calculator.
Legal Fees
These fees cover services provided by property lawyers or conveyancers, including title searches, contract reviews, and settlement processes.
Pre-purchase Inspections
A comprehensive pre-purchase inspection identifies structural or pest issues. Addressing potential problems early prevents costly repairs down the line.
Strata Search
For apartments and townhouses, a strata search reveals the financial health of the building's management and any disputes.
Ongoing Costs
- Body Corporate Fees
- Council Rates
- Water Bills
- Landlord Insurance
- Lease Expenses
- Land Tax
- Loan Interest
- Management Fees
- Repairs and Maintenance
Final Thoughts
Real estate investing requires thorough planning and financial discipline. From securing the right investment property loan to selecting the best property to rent out, success depends on understanding both upfront and ongoing costs.
Frequently Asked Questions
What’s the difference between negative gearing and positive gearing?
Negative gearing occurs when rental income is less than expenses, leading to a tax deduction. Positive gearing means rental income exceeds costs, generating profit.
How much deposit do I need for an investment loan?
Typically, lenders require a 20% deposit, but some loans allow smaller deposits with mortgage insurance.
Is landlord insurance necessary?
Yes, it provides coverage for property damage, loss of rental income, and legal costs.
How do I calculate rental yield?
Divide the annual rental income by the purchase price and multiply by 100 to get the percentage yield.
Can I use equity to buy an investment property?
Yes, you can use the equity in your current home as collateral for a new real estate investment loan.