Buying An Investment Property In Australia – A Complete Guide

The latest data from the Australian Taxation Office (ATO) shows that there are about 2.24 million property investors in Australia as of FY21. This represents about 20% of Australia’s 11.4 million taxpayers.

Your financial success in property investment depends on making informed decisions. By thoroughly researching the market, understanding location trends, and complying with legal regulations, you can protect yourself from financial risks, maximise returns, and make strategic long-term plans.

This article is for those who are getting started with property investment or purchasing their second property as an investment. We cover key areas such as the types of properties to invest in, strategies for capital growth and rental yield, and factors that affect property values, like economic trends, interest rates, and infrastructure development. We also outline the pros and cons of owning an investment property, the costs involved, and the importance of managing risks.

Whether you’re a first-time investor or looking to expand your portfolio, we’re here to help you navigate the property market.

Property Investment Guide 101

Learn the ins & outs of investing in properties from an experienced property investor and founder of Home Loan Experts, Otto Dargan.

What Is Property Investment?

Property investment, or real-estate investment, involves purchasing real estate to earn a return on investment (ROI) through rental income, future resale or both. It’s a popular strategy for building wealth over time because real estate can appreciate in value, providing both ongoing income and potential capital gains.

An investment property is not used as a primary residence and can come in various forms, such as residential, commercial, or mixed-use properties. It may be held by an individual investor, a group of investors, or a corporation.

Why Should I Invest In Property?

Investing in property offers consistent rental income, long-term capital growth and tax benefits. It provides more stability than stocks, as property values typically appreciate over time. Additionally, financing options for property investment are often easier to secure.

• Consistent Returns and Long-Term Growth: With the right property, rental income can generate steady cashflow, often covering mortgage repayments and providing additional income. This creates a reliable source of wealth growth over time. Additionally, property values in Australia have shown consistent appreciation, especially in high-demand areas. By strategically investing in such locations, you not only benefit from rental income but also enjoy long-term capital growth, enhancing your financial portfolio and overall wealth in the long run.
• Security and Stability: Compared with shares, property tends to be more stable. The real-estate market also moves slower than the share market, giving you more time to make smart decisions. While shares can fluctuate quickly, property values usually grow steadily over time.
• Tax Benefits: There are several tax perks to owning an investment property. If your rental income doesn’t cover all your costs, this means you have negative gearing and can subtract the amount your rental income fell short from your taxable income. You can also claim depreciation as a deduction and get other tax breaks throughout the year.

Australian Property Market Trends and Statistics

The Australian property market has experienced strong long-term growth over the past 30 years, characterised by distinct cycles of growth and decline. CoreLogic data shows that dwelling values have increased by 382% since 1992, averaging 5.4% annual growth. Long-term data also shows the cyclical nature of the property market, with six cycles of growth and six cycles of decline, influenced by various factors such as taxation laws, monetary policy decisions, and broader economic conditions.

Historically, the performance of the market has varied across different decades. The period from 1992 to 2002 brought the highest capital gains, with the national Home Value Index (HVI) increasing by 77%. This was followed by a 59% rise from 2002 to 2012 and a 72% increase in the most recent decade, from 2012 to 2022. These figures highlight the strong upward trajectory of property values over the long term.

Key Market Trends Over The Past Decade (2012-2022)

• Growth in Dwelling Values: Over the last decade (2012-2022), national dwelling values increased by 72%. This growth reflects a strong upward trend in the property market, despite fluctuations.
• Regional Variations: There has been a notable disparity in growth rates between capital cities and regional areas. Capital city dwelling values rose by 409% in the most recent decade, while regional areas showed a lower increase of 294%. This highlights a trend of higher demand and limited supply in urban centres.
• House vs. Unit Performance: House values across capital cities increased by 453%, outpacing unit values, which rose by 307%. This trend indicates a greater scarcity of land and higher demand for stand-alone homes than units.
• Record Sales Volume: About 617,300 homes were sold during the peak of the latest growth cycle in 2021, marking the largest number of sales since 2003. This represented only 6.3% of the total housing stock, however, underscoring that most homeowners remain unaffected by short-term value changes.
• Holding Periods: The median hold period for homes purchased in the past year was about nine years, reflecting a long-term investment approach, rather than frequent trading among homeowners.

Impact Of Economic Factors On Property Values

The property market has been influenced by various economic factors, including interest-rate changes, taxation policies, and fiscal stimulus measures. Recent trends have led to volatility, as interest rates have begun to rise, affecting buyer sentiment and market activity.

• Interest rates: When the Reserve Bank of Australia (RBA) lowers the cash rate, as seen in the COVID-19 pandemic response, mortgage affordability increases, leading to higher demand for housing.
• Economic Growth: During the mining boom (2004-12), regions like Perth experienced property value increases due to job creation and economic prosperity, leading to a surge in demand for housing.
• Inflation: Inflation affects purchasing power and can lead to increased costs for construction and materials. Excessive inflation can deter investment and lead to economic instability, negatively affecting property values.
• Government Policies: The introduction of the First Home Owner Grant increased demand among first-time buyers, driving property prices up in various markets. Conversely, policies that restrict negative gearing or increase property taxes can lead to decreased demand, as seen in discussions around housing affordability in urban areas.
• Supply and Demand Dynamics: The undersupply of housing in major cities like Sydney and Melbourne has contributed to rising prices, as highlighted in CoreLogic reports that show a mismatch between housing supply and demand.
• Global Economic Influences: Global economic factors can also have local impacts. For instance, the trade tensions between the US and China have implications for Australia’s economy, particularly in sectors reliant on exports. A slowdown in trading with key partners can lead to job losses in Australia, which can negatively affect property values, especially in export-driven regions.

Property Investment Strategies

There are two main property investment strategies:

• Capital growth
• Rental yield

Seasoned property investors can also mix the two strategies.

Capital Growth Strategy

The capital growth strategy is about investing in properties located in areas with strong demand and potential for long-term value appreciation. Investors using this approach focus on buying properties in locations likely to experience strong economic growth, infrastructure development, and population increases.

This strategy is most commonly applied in major metropolitan areas where the property market is driven by factors like job opportunities, amenities, and future development plans. These areas are expected to have property values increase over time.

Examples of capital growth strategies include:

• Negative Gearing: This involves purchasing a property where the rental income is less than the mortgage repayments and other holding costs. Investors rely on associated tax benefits and potential capital growth to offset these short-term losses.
• Flipping: Buying, renovating, and quickly selling a property for a profit, capitalising on market demand and improving property value.
• Subdivision: Dividing a property into smaller lots and selling them individually, which can greatly increase overall profits.
• Buying off-the-plan: Purchasing a property before it is constructed, often at a lower price, with the expectation that its value will rise by the time it is completed.

Rental Yield Strategy

The rental yield strategy focuses on purchasing properties that generate high rental income relative to their purchase price. The goal is to achieve a steady, reliable cashflow from rental income, which may cover or exceed the property’s holding costs.

This strategy is typically applied in affordable suburbs or regional areas with strong rental demand. These areas might not experience high capital growth, but they offer higher stronger rental returns.

Examples of rental yield strategies include:

• Positive Gearing: This occurs when the rental income exceeds the mortgage payments and other expenses, resulting in an immediate profit.
• Buy and Hold: Purchasing properties and holding onto them for an extended period while collecting rental income. The focus here is on long-term rental income, rather than short-term gains.
• Rentvesting: A strategy where investors rent out their own property for rental income while living in a rented property elsewhere, often in a more desirable location than they could afford to buy in.
• Buy, Renovate and Hold: Purchasing a property, improving it to increase its rental appeal, then holding onto it for long-term rental income and potential capital growth.

Best Types Of Property To Consider

When considering property investment, it’s important to understand three key types of properties:

• Residential
• Commercial
• Vacant land

Residential properties, like single-family homes or apartments, offer steady rental income and potential appreciation but require ongoing management. Commercial properties, including office buildings and retail spaces, typically yield higher rents with long-term leases but come with larger upfront costs and regulatory requirements. Vacant land provides an affordable option with potential for future development, though it doesn’t generate immediate income.

Learn more about the different types of investment properties.

Should I Invest In A House Or An Apartment?

When deciding between houses and apartments for investment, it’s important to consider both capital growth and rental yield.

Houses offer better potential for long-term value appreciation, due to the land component, making them ideal for investors focused on capital growth.

On the other hand, apartments generally provide higher rental yields, especially in urban areas, making them attractive for investors seeking steady cashflow.

Understanding these distinctions can help you choose the property type that aligns with your financial goals.

Houses Vs Apartments

When comparing houses and apartments as property investments, several factors come into play, including affordability, rental yield, capital growth and maintenance costs. The table below provides a clear comparison between these two property types

Top Australian suburbs for Property Investment

The Best of the Best 2023 report from CoreLogic states that these were the top-performing houses and units across various categories in that year.

Highest Capital Growth Areas For Houses

Highest Capital Growth Areas For Units

Factors To Consider When Choosing A Location

When choosing a location for property investment, familiarity with the area can be an advantage, as it allows you to leverage your knowledge of tenant demographics and property values. It’s also important to focus on tenant preferences and consider the area’s vacancy rates, which indicate demand. Engaging with local experts, such as buyer’s agents and accountants, can provide valuable insights about the region, ensuring you make informed decisions.

Additionally, assess local infrastructure developments and council plans, which can enhance property value over time. Investigate access to essential amenities, such as schools and shopping centres, as they can increase the property’s rental appeal. Understanding crime rates and evaluating supply and demand will also help in selecting locations with stable rental income potential while avoiding oversaturated markets.

Balancing these factors will help you make a sound investment decision.

For more detailed tips, check out our guide on How to Choose a Location for an Investment Property.

Pros And Cons Of Owning An Investment Property

Owning an investment property comes with both advantages and disadvantages that an investor must consider.

Pros

The pros of buying and owning an investment property include:

• Stable Investment: Property markets tend to be less volatile than other investments, offering potential for capital growth over time.
• Positive Cashflow: Rental properties can generate passive income, allowing rents to help pay off the mortgage.
• Tax Benefits: Property owners can benefit from tax deductions, especially with negative gearing, which reduces taxable income.
• Physical Asset: Investing in property provides a tangible asset that can be rented out or lived in.
• Building an Investment Portfolio: Properties can increase in value and generate cashflow, allowing investors to expand their portfolios over time.

Cons

The cons of buying and owning an investment property include:

• Negative Gearing Risks: This strategy can lead to an inability to make your mortgage repayments if circumstances change the wrong way, requiring a property sale before value appreciation.
• Low Liquidity: Property is not easily liquidated, and selling can take time, which may be problematic in emergencies.
• Market Fluctuations: Not all properties appreciate in value; some may decline, leading to negative equity.
• High Entry Costs: Initial costs such as deposits, stamp duty and legal fees can be significant barriers to entry.
• Tenant Challenges: Difficult tenants can increase maintenance costs, and there is a risk of having no tenants, leading to financial strain.

Read more on the pros and cons of owning an investment property.

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Cost Of Investing In Property

Investing in property entails various expenses that can affect overall returns, including upfront costs, ongoing costs and hidden fees.

Costs Of Owning An Investment Property

Upfront Costs	Ongoing Costs	Hidden Costs
Deposit	Property Management Fees	Vacancy Periods
Stamp Duty	Council & Water Rates	Capital Gains Tax (CGT)
Building & Pest Inspection Fees	Building & Landlord Insurance	Interest Rate Increases
Lenders Mortgage Insurance (LMI)	Repairs & Maintenance	Market Fluctuations
	Strata Fees
	Land Tax

Learn how much you need to cover the costs when you own an investment property.

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Getting An Investment Home Loan

There are many loan types to choose from and understanding them is essential for aligning your financing with your investment goals. Once you decide on a type and apply for an investment loan, lenders will assess your borrowing capacity. Read on for details.

How Much Can I Borrow?

This typically depends on factors like your income, existing debts, and the specific lender’s policies. You can use our investment property borrowing power calculator to get an estimate tailored to your financial situation.

Several factors influence your borrowing capacity and the required deposit, including your credit history, income stability, existing liabilities, and the property’s location. Lenders also consider the rental income potential of the investment property when determining how much they will lend.

Types Of Investment Loans

The different types of investment loans cater to different financial strategies and investor needs.

• Principal-and-interest loans: You will pay both the principal amount and interest over the loan term. While you build equity faster, the repayments will be higher than on an interest-only loan.
• Interest-only loans: You pay only the interest on the loan for a specified period from 3-5 years. After this period, your repayment switched to include both principal and interest payments. While the repayments are lower, no equity is built during the interest-only phase.
• Equity loans: These enable you to borrow against the equity of an existing property to finance the purchase of an investment property. An equity loan is useful for those looking to expand their property portfolio without needing a large cash deposit. While you get access to funds without the need to sell existing assets, it increases the overall debt and financial risk if the value of the property declines.
• Variable-rate loans: The interest rates for these loans fluctuate based on market conditions. This type of loan can be advantageous if interest rates decrease; they pose a risk if rates rise.
• Fixed-rate loans: With a fixed-rate loan, the interest rate is locked for a specified period, providing certainty in repayment amounts. The downside is that you don’t benefit from a lower repayment if interest rates fall during the fixed period.

Maximise Your Investment Returns

Let us help you find an investment loan that aligns with your investment property goals.

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Managing An Investment Property

Managing an investment property involves a range of responsibilities to ensure it’s profitable and well maintained. This includes finding and screening tenants, handling lease agreements, and addressing tenant issues. Regular maintenance and repairs are crucial to keep the property in good condition, along with ensuring compliance with safety and legal regulations. Financial management is also key, including rent collection, budgeting for expenses, and maintaining profitability. Property owners can manage an investment property themselves or hire a professional property management company for assistance.

Hiring a Property Manager vs. Self-Management

When deciding between hiring a property manager and self-managing your investment property, several factors come into play.

Hiring a property manager offers convenience and expertise, as they handle tenant screening, rent collection, maintenance, and legal compliance. This is ideal if you have multiple properties, live far from your investment, or lack the time or experience to manage it yourself. It comes with the cost of management fees, however, typically around 7-10% of the monthly rent.

Self-management gives you complete control and can save you money on management fees, but it requires time, effort, and knowledge of property laws. It may be suitable for you if you have the time to dedicate to the property and are comfortable handling tenant issues, maintenance, and legal matters on your own. It can be stressful and time-consuming, however, especially if problems arise.

Your decision should be based on your experience, available time, and the complexity of managing your property.

Dealing with Tenants and Legal Obligations

Understanding tenant rights and responsibilities is crucial for both landlords and tenants. Landlords have the right to receive rent on time, expect tenants to maintain the property, and conduct inspections with proper notice. Tenants must pay rent punctually, maintain cleanliness, and avoid unauthorised subletting. Managing tenant issues effectively involves maintaining open communication, documenting breaches, and following legal procedures, such as issuing breach notices or seeking tribunal intervention, if necessary. Landlords also have legal obligations, including providing a habitable property, performing necessary maintenance, and respecting tenant privacy.

Maintenance and Property Upkeep

Maintaining an investment property is essential for preserving its value, ensuring tenant satisfaction, and meeting legal obligations. Regular maintenance is crucial for avoiding costly repairs, enhancing the property’s appeal, and reducing vacancy rates.

Effective strategies include conducting regular inspections, developing a maintenance checklist, addressing repairs promptly, and setting a maintenance budget.

Additionally, hiring professionals for specialised tasks and keeping detailed records are both vital.

Risk Management Strategies

Effectively managing risk is essential for successful property investment. By implementing strategies such as mitigating market risks, diversifying investments, and ensuring proper financial planning, investors can protect their assets and maximise returns.

Mitigating Market Risks

Investors should stay informed about current trends, economic indicators, and regulatory changes. Conducting thorough due diligence before purchasing – such as assessing the property’s condition and local market potential – helps mitigate risks. Regularly reviewing your property portfolio to ensure alignment with your investment strategy is also crucial in adapting to market shifts.

Diversification and Insurance

Diversification is key to reducing risk by spreading investments across different property types and locations. This approach minimises the impact of downturns in any single market segment. Additionally, securing appropriate insurance, such as landlord and building insurance, protects your investment against unforeseen events like tenant damage, fire or storms.

Financial Planning and Contingency Funds

Sound financial planning is vital for managing risks in property investment. Investors should establish clear budgets, maintain cash reserves to cover unexpected expenses and stress-test their finances against potential challenges like interest-rate hikes or vacancies. Having contingency funds in place ensures you can manage financial disruptions without jeopardising your investment.

Client Success Stories

$2.2 Million Investment Property

Daniel and Grace, an expat couple, sought a $2.2 million loan to purchase an investment property in Pymble but faced challenges due to their foreign income. Despite earning over $527,000 annually, they struggled to find a lender to accept their full income. After setbacks with previous brokers, they turned to Home Loan Experts, who secured the needed loan by finding a lender that accepted 90% of their foreign income. The couple successfully acquired the investment property and praised Pramesh’s expertise.

Read their full story here.

How Rameshwara Secured a $2M Commercial Loan

Rameshwara, a seasoned investor, needed a $2 million commercial loan to purchase a business property but faced challenges due to complex financials and a lack of adequate documentation. After being turned down by multiple lenders, he approached Home Loan Experts, who successfully secured a lender willing to finance the loan based on his strong rental income and asset position. Rameshwara was able to acquire the property and praised the team for their persistence and expertise in navigating the complex commercial loan process.

Read the full story here.

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Your Property Investment Journey Starts Here

Investing in property can be a powerful wealth-building strategy, offering opportunities for rental income, capital growth, and tax benefits. By understanding the market, choosing the right investment strategy, and selecting suitable property types, you can make informed decisions that align with your financial goals.

If you want to know more about investing in property or are ready to take an investment loan for your next property, Home Loan Experts can help you. Call us on 1300 889 743 or enquire online today.