Could an investment property be your pathway to homeownership?

With interest rates and national property prices trending higher, prospective homeowners may need to consider alternative pathways to getting their first home loan. 

The challenges have certainly mounted in 2023. 

Lenders are already announcing rate increases in response to the Reserve Bank of Australia’s (RBA) 25bps cash rate increase in May and property prices across the country rose 0.14% in April, according to the PropTrack Home Price Index, marking the fourth consecutive monthly rise. 

But despite these pressures, there are still ways for would-be buyers to get their foot in the door.

Building equity in an investment property: the long game 

While it’s possible to use home equity to buy an investment property, the process also works in reverse – using the equity built up by paying off an investment property to help fund the purchase of an owner-occupied home. 

The basic concept goes that as the investment home loan is paid off, the owner gains equity, which can then be used to put a downpayment on another property.  

Of course, the problems of property prices and rising interest rates still exist for those with their investor hats on. This is where buyers need to get creative – and strategy matters. 

Yes, buying an investment property takes a fair bit of research and carries some risks. The end goal for many property investors is to have the market value of their property grow, thus adding equity or making it easier to sell for a profit. 

One common tactic is to go beyond your preferred area, which we’ll get into below.

Consider investing away from where you would usually choose to live

If the areas you’re interested in are typically pricier, meaning it’s hard to get a foot on the property ladder there, consider investing somewhere cheaper. 

This could be as simple as searching for a place a few suburbs away, looking at regional towns, or even investing in property in another state.

Take South Australia, for instance. Adelaide recorded 5.23% annual growth, and the rest of SA skyrocketed with a 10.28% growth rate over the past year, according to PropTrack. That’s enough of a difference that it demands some extra study.

The boost in SA’s regional areas can be attributed in part to the popularity of the southeast’s  Limestone Coast, whose suburbs boasted a combined 15.7% yearly growth rate, according to CoreLogic’s February Regional Market Update. 

Western Australia recorded growth too, with the state’s home prices trending up 5.58% over the last year, and the capital, Perth, growing a solid 3.11% annually. Again, the difference is noteworthy.

The point is, despite the national home price growth rate falling 3.14% over the past year, according to PropTrack, there are some areas outside of the major cities, or in other states, that experience upticks in home values, presenting an opportunity for investors to grow their equity.

Units present a lower financial barrier to entry than houses 

One of the main choices property investors (and homeowners) need to make is whether to purchase a unit or a house. 

Units are often the cheaper option, with the median value of a unit in capital cities nationally at $631,000, compared to the median value of houses at $878,000, according to PropTrack. 

The lower financial barrier to entry can mean cheaper mortgage repayments and a quicker path to gaining equity. Of course, it does depend on the area you’re purchasing in and the way the market is moving. 

If we get more specific, a unit in the Top End (Darwin) has a median value of $386,000, for example. Compare that to somewhere like Sydney, where median unit prices are over $770,000. So the difference is stark. 

Still, you’ll need to consider the long-term growth of investing in either of those cities: is there demand? Demand is crucial property because ‘ongoing demand’ will help keep the value of your property high.

Make sure you have an investment home loan in your corner that works for your needs 

There are plenty of choices out there when it comes to investment home loans. So, making sure that your loan has an interest rate you can afford and one that’s fit for purpose is an important thing to work out.

While loan options like an interest-only loan may be attractive to many property investors, if you’re trying to build equity in order to purchase your own home, it’s likely not the right option for you. This is because interest-only loans don’t pay down the value of the home (the principal amount borrowed), which is where your equity comes from. 

RELATED: Investment loan features to compare 

If you’re looking to compare investment home loans, have a look at the featured products below, or check out the best home loans in Australia – the winners of the 2023 Mozo Experts Choice Home Loan Awards.