Things to consider when buying an investment property



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Buying property is the most popular form of investment in Australia. However, there are chances you may end up biting more than you can chew, unless you understand the whole nine yards (or almost) about property investment.

While buying and renting out a house can provide steady income, costs associated with holding a property can turn it into a not-so rewarding proposition. Here’s a handy guide with everything you need to know before you jump on to the property bandwagon.

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Buying property is the most popular form of investment in Australia. However, there are chances you may end up biting more than you can chew, unless you understand the whole nine yards (or almost) about property investment.

 

Why invest in property

 

Let’s start right from the start, why should someone invest in a property?

  1. Firstly, because low interest rates mean you can secure a mortgage for less than 4% per annum. However, only borrow if you can afford to borrow – check your borrowing capacity and expected repayments to know what you can afford.
  1. If you choose the right kind of property (we will tell you how), rental income will take care of the mortgage and other expenses associated with the property. The key, however, is to identify a tenant worthy property in a well connected area.
  1. Strong capital growth, especially in booming suburbs makes for a smart investment (click here to spot the next booming suburb for buying a house).
  1. Strong future demand - As population increases and family size decreases, it is expected that the demand for houses will go up by almost 600,000 by the year 2030.
  1. Generous tax deductions – Most expenses, costs and losses can be offset against taxable income.

It is, however, advisable not to keep all your eggs in one basket. Aim for a diversified investment portfolio (shares and equity, bank deposits etc.) and keep some liquid cash handy for emergencies. Poor rental income, accessory costs and interest fluctuations must be kept in mind before buying a property.

Tip – Always account for at least 2% higher interest rate when planning your repayments. Want to take advantage of the current rates for a long time? Check out some great fixed rate home loan deals.

 

How to choose the best property

 

  1. Research

The bedrock of finding a good property is neck deep research. Check out future council plans, proximity to schools, public transportation, super marts, rental yield, rental growth and vacancy rates.

Know how the properties in your selected suburb are performing with our free property report up for grabs!

  1. Where to buy?

With properties in Sydney and Melbourne sky rocketing, it may be time to invest in the next booming suburbs. Suburbs neighbouring high-growth areas offer low entry rates and easy access to amenities in the neighbourhood. New development plans (think Queensland, thanks to 2018 Olympic Games), younger population, more established dwellings and lesser constructions, all point towards a property gold mine. Read how to pick the best suburb for your investment.

  1. Renovations

It is a good idea to spend some bucks renovating the house, making it more tenant-worthy. However, choose tenant friendly renovations that add value to the house. More than luxury, tenants want functionality. You can use the equity in your home to fund renovations. Learn how.

  1. Inspection

Inspecting a property before signing the dotted line can save you tons on repair work later.  Renovating a run down house that you got for cheap can often cost thousands you haven’t accounted for.

  • Check the closets and drawers for pests or moulds.
  • Check toilets for any signs of leakage.
  • Are there any cracks on the walls?
  • Do you see any damp spots on any of the walls?
  • Are the rooflines straight and not damaged?
  • Walk around the house to check if drainage is proper.

 

Understanding property investment basics:

 

Costs - Buying an investment property has several ongoing costs associated with it - cash costs such as interest payments, insurance premiums, agent costs and maintenance costs, and non-cash costs in the form of depreciation costs. Thus, you don’t just pay once!

Tax Deductions - If you own an investment property, you can claim tax deductions on the interest on your mortgage and the cost of renting and maintaining the property. Further, deductions can also be claimed for capital works depreciation such as tiling and doors of the house. Get a depreciation schedule made to know what you can claim in terms of property depreciation.

Negative Gearing - As per the concept of negative gearing, if the cost of owning your rental property exceeds the rental return, you can offset the losses against your taxable income.

However, many people mistake negative gearing to be an investment strategy, overlooking long term losses in the eye of potential tax benefits. As a savvy investor, always aim for a positively geared property. Click to learn more about negative gearing.

Using equity in your home – Equity refers to the current market value of your house minus the mortgage amount owed on the house. Lenders will allow you to use up to 80% equity in your home to buy an investment property.

Using experts – Whether you have bad credit, paucity of time or simply looking for the best mortgage deal, an experienced and verified mortgage broker can help you breeze through the process of financing.

Similarly, hiring a property manager to take care of your rental property can save you significant amount of time, money and hassle. Property managers will find tenants for your property, collect the rent and handle day-to-day problems of your tenants, all for a small fee!

A case study of two friends

Samantha and Lily are childhood friends. They are in mid 30s and decide to buy investment properties in close proximity. Both choose identical apartments located in close proximity to the train station, some schools and a nice park.

When it came to financing their investment property, they spent some time comparing home loans and got a great deal – 4.5% interest rate for 20 years.

Samantha had savings of $250,000 (so she borrowed only $150,000) while Lily only had $100,000 in tow (so she borrowed $300,000) as she had recently taken a foreign vacation.

 

 

Samantha

Lily

Savings

$250,000

$100,000

Loan Amount

$150,000

$300,000

Monthly repayments

$948.97

$1897.95

Annual Salary

$65,000

$65,000

Rental income (per annum)

$24,000

$24,000

Costs (interest plus expenses)

$16,000

$27,000

Net Income

$73,000

$62,000

 

While Lily can take advantage of negative gearing as her expenses exceed rental income, Samantha’s net income is much more than that of Lily, thanks to her positively geared investment.

Buying a property is one of the most important financial decisions you’d take in your lifetime. We understand it is natural to be confused, especially with so many options and deals available in the market.

Do you have questions about property purchase you need answers to? Ask an expert at HashChing to receive instant answers for all your concerns from verified financial experts within minutes, absolutely free of cost.

- By Mandeep Sodhi

 

Mandeep Sodhi is the co-founder and CEO of HashChing. With over a decade of experience in financial services, Mandeep has worked at big 4 banks on major digital transformational projects prior to starting HashChing.

HashChing

HashChing

HashChing is Australia's first online marketplace allowing consumers to access great home loan deals without having to shop around. Completely FREE to consumers, HashChing connects you directly to verified mortgage brokers who can further negotiate a better rate from the lenders and save you time, hassle and money.

Things to consider when buying an investment property
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