A lot of people have been able to generate high amounts of revenue from investing in property. The strength of the Australian property market makes it ideal for investors.
If you want in on the action, you need to know what you’re getting yourself into.
Working Out How Much You Can Borrow
You can’t start looking for investment properties until you know how much you can borrow. You need to take both your income and your expenses into account, as these are the main things that home loan providers will look at.
Expenses are particularly important. In addition to your personal essentials, you need to factor in any debt that you have outstanding. In fact, it may benefit you to reduce any debt you have before applying for a home loan. This will ensure your expenditures don’t prevent you from investing as much as you could into your new property. It will also improve your credit rating, which increases your chances of getting a loan.
With regard to income, you have to think about how owning a new property will affect you. For example, the amount of income tax you pay may change once you own a property. As a result, you need to do some future planning, as well as work out what you earn right now. It’s a good idea to get professional advice about how your taxable income could be impacted by an investment property.
We at uno can help you with working out your borrowing power. Use our calculator to get an estimate on how much you can borrow.
Consider the Fees
Lenders often attach several fees to their home loan products. For example, you may have to pay an application fee, in addition to ongoing charges for the lifetime of the loan. Some lenders also charge Lender’s Mortgage Insurance, though this is usually only for home loans with a loan to value ratio that exceeds 80%.
here are also other fees to keep in mind. For example, you may have to pay legal fees for any conveyancing work the property needs. Furthermore, it’s important to consider the cost of stamp duty. This will depend on the state, purpose and value of the property. It could cost you thousands of extra dollars, which might influence the location you choose for your investment property.
You also need to consider the fees you will pay once you are the property owner. These could include building insurance, landlord insurance, and the costs of maintenance. How you structure your tenancy agreements will also influence the fees you pay. Some investors offer to pay the utility bills for their tenants so they can attract more interest. However, this obviously adds expenses that you need to consider.
What Are My Home Loan Options?
A lot of investment home loans offer features that may prove useful. For example, you could choose to repay only the interest for a set period of time, or open a line of credit once you’ve built equity in the property.
There are hundreds of home loan products from dozens of lenders. As such, it’s best to work with one of our mortgage brokers to find one that suits your circumstances.
Once you’ve made your choice, you need to submit an application for the loan. This is a vital step. If you don’t have pre-approval on a home loan, a lot of sellers won’t take you seriously.
Pre-approval means that your application has been accepted, but the lender still needs to carry out some final checks. Nevertheless, having it before you start looking is beneficial. It improves seller confidence and gives you a budget to work with.
Finding the Right Property
Now you know how much you can spend, you need to start looking at properties. Research is your friend here. You need to conduct due diligence on every property you consider. This involves everything from researching property statistics in the area, through to visiting the property yourself.
Your visits will play a role in the decisions you make. Pay attention to the neighbourhood, as well as the state of the property. For example, if you see a lot of young families in the area, you can feel fairly certain that the property will experience demand from tenants with children.
Above all else, you need to take emotion out of the equation. It doesn’t matter if you have fallen in love with the property. You have to think about what your potential tenants will think of it. Remember that investing is a business. Treat it as such to avoid bidding too high or buying a property that won’t generate a high enough income.
A Word on Gearing
We’ve covered negative gearing in more detail in another article. However, it’s also worth touching on it here.
Gearing relates to your cash flow. If a property is positively geared, it will generate a cash flow. Negatively geared properties cost more money to maintain than they generate.
This may not seem like a good thing at first. However, you must remember that you can offset these losses against any other assets you have. With the right advice, you could turn negative gearing to your advantage.
This is a complex area of investing, so you must speak with a tax professional before attempting to use negative gearing as part of your investment strategy.
What to Do Next
These are the basics of buying an investment property. There’s a lot more to learn before you buy.
Our mortgage brokers can help you. Contact us today, either online or via telephone, to find out how we can help you to secure the ideal home loan for your investment property.
This information is general in nature and you should always seek professional advice when making financial decisions.