While real estate remains the top choice for low-risk investment in Australia, it isn’t always a sure-shot way to get positive returns. You make one wrong move, and you lose out on making thousands of dollars.
One way of hedging against the uncertainty of positive returns is taking out a mortgage.
There are many benefits of purchasing an investment property through a home loan depending on your situation:
- Contribute less: You are usually required to contribute only 20% of the property price for the deposit – sometimes less. The home loan will cover the rest.
- Neutral Gearing: You can use your rental income to make the repayments for the home loan. If your rental income is equal to your property expenses, you own the house, and the mortgage is under your name, but it’s like someone else is making your repayments for you.
- Positive Gearing: If your rental income exceeds the expenses of owning your property, you’re free to keep what’s left after paying your mortgage and other costs. This way, you will earn your 20% deposit back sooner than if you had made 100% of the investment on your own, giving you positive returns sooner.
- Negative Gearing: In this case, your rental income does not suffice to pay your mortgage and other expenses of owning your property; however, when this happens, the Australian Government allows you to deduct the shortfall from your taxable income.
Now that you know the benefits of purchasing an investment property through a home loan, the next step is to learn how to become a successful property investor through this route.
17 Tips For Buying Investment Property
1. Get A Construction Loan
Building your investment property, instead of buying an existing one, can often save you money, depending on the cost of materials and labour. In addition to a potentially lower price tag for the property, taxes levied are generally lower as well.
Some of the tax benefits of purchasing an investment property through a construction loan include the following:
Construction Loan for Investment Property – Client Story
Mary, Victoria
Goal
To get an investment loan for construction purposes.
Background
Mary, a 48-year-old divorcee, wanted to start investing in property. Her stable job of 10 years and good credit history made her a low-risk borrower. She also had saved up enough of a deposit for the loan amount she had in mind. So when she came to Home Loan Experts for our service, we were able to get her a quick pre-approval.
Unlike many of our clients, Mary’s problems started mid-application, and came one after the other. First, after the pre-approval, she started having second thoughts about the type of investment loan she wanted. She had first applied for a land and construction loan, but mid-application, she wanted us to convert the loan for an established house instead. She then wanted us to rework the application for a second time to switch back to a land and construction loan. After that, Mary signed the Contract of Sale under her new company’s name, making her mortgage a trust deal, something she had not told us about beforehand.
Solution
Here’s everything our brokers did to get Mary’s pre-approved investment loan to settlement:
- Found the best lenders for her to choose from, based on her needs and their lending policies.
- Filled out all the paperwork on her behalf.
- Convinced the lender to amend the existing loan application every time she changed the loan purpose and type, instead of requiring a new loan submission, saving time.
- Submitted an accountant’s letter to the lender to confirm that her new company did not hold any liabilities and had not participated in trading yet, making her Pay-As-You-Go income acceptable for servicing her loan.
- Processed the land and construction loans under a single application to further speed up the process and comply with the lender’s policy.
- Submitted a statutory declaration alongside the loan application to resolve the client’s legal name discrepancy.
- Attached closure letters for two of Mary’s credit cards to prove she intended to lower her expenses.
- Gave Mary frequent updates on any developments in the loan process.
Upon finally getting the formal approval, Mary got herself a land and construction loan at a Loan-to-Value Ratio of less than 80% for property worth $1 million. She split the loan into two halves, one for land and the other for construction, at a variable interest rate of 2.49% each.
Had Mary applied for the loan all by herself and got into the problems that she did mid-application, the loan would have certainly taken over a year to go through, with all the changes. Luckily for her, she had one of our best brokers representing her.
2. Set A Budget You Can Afford
It is usually best to put yourself in a strong financial position, with cash on hand for a deposit, before pursuing an investment loanIt would be best if you prioritised any other financial goals you might have before jumping in for an investment loan, as you may be entering a loan term of 25 or 30 years, depending on the size of the deposit you’ve saved.
Here’s a snapshot of the upfront and ongoing costs you may encounter:
- 20% deposit of the purchase price (usually)
- Lender’s Mortgage Insurance (if applicable)
- Loan application fee
- Stamp duty, mortgage registration and transfer fees
- Legal and conveyancing costs
- Building, pest and strata inspection fees
- Loan repayments and interest charges
- Repairs and maintenance costs
- Property management fees
For a clearer understanding of the costs, you can use our purchasing costs calculator.
3. Invest With Less From Your Own Pocket
Getting an investment property loan is already a sweet deal. But what if you don’t want to spend the standard 20% deposit and still want to avoid paying Lenders Mortgage Insurance?
There are plenty of options available to borrow above 80% LVR without paying LMI.
- Borrow up to 105% of the property value with a guarantor (your guarantor’s property must be in Australia).
- Borrow up to 100% using the equity in another property.
- Borrow up to 95% with the First Home Loan Deposit Scheme (FHLDS) or other government schemes.
- Borrow up to 95% with a gift deposit.
- Borrow up to 95% with a personal loan as a deposit (low-risk borrowers only).
- If you qualify for one of the above schemes, you will be saving thousands of dollars on your deposit and LMI.
Guarantor Loan For Investment Property – Client Story
Evan, NSW
Goal
To purchase an investment property through a guarantor loan.
Background
Evan was an Australian citizen keen to purchase his first investment property – but he had no funds. His obvious choice was to turn to a lender, but he would still have to chip in the standard 20% deposit on his own.
Since Evan did not want to spend a penny of his own money on the investment property, he researched and found out that taking a guarantor loan was the best option for him. He decided he would get his parents to become his guarantors, so he could borrow 105% of the property value, including the applicable LMI.
The only problem was that his parents’ property was already under an existing mortgage. Not sure what he could do about it, he turned to us.
Solution
We connected Evan to one of our expert mortgage brokers, who, with his team, came up with the following solutions to get Evan the investment loan:
- Found the best lenders to choose from, one that would allow his parents to be guarantors and use their home as security on Evan’s loan, even though they already had a mortgage on the property.
- Filled out all the paperwork on his behalf.
- Got his guarantor a second mortgage consent that allowed him to use it as security for his investment property loan. Getting the consent was not easy, as the existing lender required their solicitor and the previous broker of the security to get involved in the loan variation. Because our broker had his dedicated loan processing specialist handle the situation on his behalf, co-ordinating with all parties went smoothly.
- Evan had to reduce his loan amount from $541,500 to $468,000, as he found a cheaper property after getting his approval in principle. Our broker sent a letter explaining the variation to the lender, to get the loan formally approved.
- As the client did not want to pay the deposit from his pocket, he took the risk of not signing the Contract of Sale beforehand. So, our broker’s team sped up the process to get his loan to formal approval and settle it.
- Gave Evan frequent updates on any developments in the loan process.
Our broker took away the stress of liaising with multiple parties to get the guarantor loan and made the process as smooth as possible for Evan. In the end, Evan bagged himself an investment property worth $450,000 through the $468,000 investment loan he received from the lender of his choice. Our broker also got him a fixed interest rate of 2.24% which was the best deal available for him. Evan became a property investor without investing money of his own.
4. Shop Around For The Right Loan
If you want to profit from your investment property, it’s essential to shop around for the loan that best suits your strategy. Each loan is different, with varying terms and conditions. So don’t just look at the interest rates.
There are plenty of lenders to choose from for your investment property. Whether you go with a traditional bank, a specialist lender, an online lender, or a wholesale one depends on your individual circumstances. You just need to ensure that you get the best deal available.
We at Home Loan Experts have a panel of 50 lenders to choose from for your case. Whether it be a case of bad credit or a straightforward home loan, we have lenders who specialise in all types of mortgages.
To find the lender that best suits your needs, fill in our free assessment form or call us on 1300 889 743.
5. Refinance Your Loan As You See Fit
Sometimes, your existing home loan structure may not be as ideal as it was when you first bought your home. In such a case, you refinance your home loan.
Refinancing your investment loan helps you to:
- Get a lower interest rate
- Get more flexible repayment terms
- Reduce the monthly repayment amount
- Qualify for cashback offers and rebates
All in all, refinancing will help you maximise the profit you earn through your investment property.
Click here to learn how Robert, an expat living in the United States, got his investment property in Australia refinanced through Home Loan Experts.
Note: While you can refinance your home loan with the current lender, most people refinance with a different, as the lender where they can get the best deal has often changed.
6. Research The Property Market
Find out what other properties are available in the suburbs where you’re looking. You’ll stay on top of this information better if you take the time to speak to local community members.
Contact several real-estate agents so you can compare rates. It also helps to let them know you’re looking at other properties. That will encourage them to be more open with their information. You can use websites that update information about rents, property values, demographics and other data on areas.
Ensure you’re informed by reputable sources such as CoreLogic, SQM research and government sources like the Australian Bureau of Statistics. MyBMT is also a free, helpful tool that has a property research and insights feature.
When you’re doing your research, ask yourself these questions:
- Am I making decisions logically instead of emotionally?
- What properties are on sale in the suburbs where I’m searching?
- Will these suburbs have capital growth potential now or soon?
- Are there any proposed developments nearby that could affect prices?
- Does the property need renovation? If so, do I have the extra funds for it?
- What are the average rental returns and vacancy rates in the area?
- Are there local amenities, such as schools, shops and transport nearby?
- Have I thought about who will manage the property?
7. Find A Good Location
The value of a property usually isn’t transparent without a thorough assessment of the property.
Sometimes, the property you are looking at seems good for its price. But things like a nearby high-transmission power line, a complex floor plan, postcode restrictions, a high crime rate, or structural faults can prevent you from getting a home loan, or a tenant if you already own the property.
To get an accurate valuation, you need to research the property itself and its location. Find out the average value of properties in the area. Factors that affect property values in an area include nearby amenities, such as good schools and transport.
Click here to learn how we helped a couple looking to refinance their investment property, which had a high-transmission powerline nearby.
8. Search Interstate
Different states have different tax rates on properties. Also, some states have lower property prices than others but at the same time a higher yield on rental income. So, if you live in an expensive state, you should shop around for interstate investment properties to gain maximum profit.
9. Be Prepared To Negotiate
Negotiating for a property is one of the most crucial parts of the property purchase process for you as an investor. You need an excellent strategy. We’ve made it easier for you by listing six property negotiation tips for the property you want. These six tips can help you make a profit right away.
10. Upgrade A Property
A property you can add value to can become a major source of passive income if you plan on building a property portfolio.
You can find old properties at unbelievably low prices in the capital and emerging cities if you search well enough. Because most of the properties in such places are incredibly costly, upscaling a low-cost old property will be profitable to you in many ways.
If you take out an investment loan to purchase a property and renovate it, you can add a tremendous amount to the price, which will:
- Allow you to set a much higher rent
- Help sell the property at a higher price
Click here to learn how one of our clients got a home loan to upgrade a property and add value to it.
11. Be Careful With Property Valuation
Sometimes, the actual valuation of your investment property might not match the estimation you or an appraiser made based on market analysis. In such a case, it can be difficult for you to convince the lender to change the loan structure mentioned in your application or challenge the valuation on your own. Having a mortgage broker by your side to present your case in the best possible way is ideal for such a situation.
12. Leverage Existing Equity
The amount of equity you have in your property is its total value minus what you owe on the home loan. You can gain equity either through capital growth or by paying down the principal of the existing loan. Then, you can leverage the equity in your current property to buy a new one.
For example: Ruby purchases an investment property for $750,000 in 2021 with a 20% deposit ($150,000) and a $600,000 mortgage. This means the property’s current equity is $150,000. Ruby can use this equity to refinance and place a deposit on a second property.
Accessing equity has financial implications, seek professional advice.
13. Find Out Whether You Want To Focus On Cash Flow Or Profit
If your cash flow is tight, then you may prefer properties with a high rental yield. If you focus on making a profit, then the emerging suburbs growing in value will have a much more significant impact than the rental yield so focus on growth areas.
There are suburbs with both high rental yields and high growth but this is the ‘unicorn’ of property investing and can be hard to find.
14. Be Mindful Of Tax Implications
Negative Gearing Can Reduce Your Income Tax
Your property is negatively geared when your costs to maintain the property are more than the rental income. In that case, you will be eligible to reduce the amount of tax you pay on your income.
For instance, say you earn rental income of $30,000 over 12 months. Suppose your net rental property expenses are $45,000. Your loss on the rental property equals $15,000 for the year, which you can deduct from your taxable income. Assuming you are in a 33% tax bracket, this reduces the tax you owe by $5000 ($15,000 x .33).
In contrast, if your property is positively geared, meaning the rent it generates is more than the cost of owning the property, you must pay tax on that rental income.
When Is Capital Gains Tax Payable?
Capital gains tax may be payable if you sell your investment property to make a profit after some time. The good news is that the costs of the property (including buying and selling costs, stamp duty, legal fees, and the real-estate agent’s commission) will be deducted when calculating the profit from the sale. If you own the property for at least 12 months, only half the profit will be subject to capital gains tax.
When you first purchase the property, keep all relevant documents so you’re able to claim everything to which you’re entitled. Also, make sure to declare all your rent-related income in your tax return each year. You’ll need to keep records of the date and costs of buying the property for capital-gains-tax purposes. Remember that keeping these records will help ensure you don’t pay more tax than you owe.
How Can I Get Potential Tax Deductions?
You will be able to claim a tax deduction on various expenses related to your investment property when it’s rented out or available for rent.
These are included but not limited to:
- Advertising costs
- Property management fees
- Borrowing expenses, including loan interest charges
- Council rates, land tax and strata fees
- Building depreciation
- Repairs and maintenance
- Cleaning and gardening costs
- Building and landlord insurance
- Accounting and bookkeeping fees
Check ato.gov.au for more information on tax deductions you can claim.
15. Leverage Your Self-Managed Super Fund
You can leverage your Self-Managed Super Fund for your investment property.
You’ll be subject to a capital gains tax of about 25% when you sell your investment property. Setting up an SMSF is one method to avoid some taxes and save your hard-earned money.
For more information on this, sit with your accountant or financial adviser.
16. Assess Your Investment Strategy
While building your investment portfolio, any property you buy needs to support your investment strategy.
Look at the property’s potential equity, how its costs or rental income will affect your ongoing cash flow and how it supports your longer-term goals; for example, suppose your strategy is to achieve a portfolio diversified geographically. In that case, purchasing multiple properties in the same area isn’t aligned with your strategy. You would need to buy in multiple places.
Some areas give stable rental returns with high rental yields, while other places offer lower yields but a higher likelihood of capital growth based on supply and demand. Holding a mixture of properties in these different areas is just one way of diversifying your portfolio.
17. Work With Property Market Experts
If you plan on starting a property investment portfolio, working with real-estate agents, property managers, and brokers will simplify the process for you.
Choosing the right broker can be difficult. Things like experience, speed and how involved the broker gets in the process must be kept in mind when making a choice.
Below are some points that differentiate us from other brokers:
- We have a panel of 50-plus lenders to choose from for your investment loan.
- All our brokers are experts in the mortgage industry who have impressive career histories. Some of our brokers are property investors themselves.
- We allocate a team of loan processing specialists, credit analysts, and customer service representatives to each of our brokers to help process your loan quickly and efficiently.
- We have a customer relationship team to handle your queries and to help you until your loan term is over. Our entire team is there to ensure your investment loan is working for you, even after settlement.
- Our website answers your investment queries with hundreds of articles relevant to home loans.
If you are looking for an investment loan, call us on 1300 889 743 or fill in our free assessment form so our expert brokers can get you the best deal available.