5 golden rules for buying your first investment property
Are you set on getting a foot in the property door but are unsure of where to start?
While investing in your first property is exciting, there are plenty of hurdles to overcome, like saving up the initial deposit and choosing the right property. In this guide, we’ve rounded up some of the golden rules when it comes to investing in property for the first time.
Let’s run you through them:
Golden rule #1 Save a decent deposit
While home loans used to be available to investors with just a 5% deposit, these days many lenders have tighter restrictions for investment loans with most requiring you to have a deposit of at least 10%. So when you factor in the cost of stamp duty and lenders mortgage insurance, you should be aiming for a deposit of 20%.
Alternatively, you could ask a parent or family member to go guarantor on your loan, which means you would be able to take out a loan with a smaller deposit. Obviously, the major advantage of having a parental guarantor is you can get into the market sooner. Just keep in mind, there are risks attached, as your parent is liable for the portion of their property they put up as security for the loan.
Read our tell all guide, for extra advice when it comes to saving a deposit.
Golden rule #2 Decide on a suburb
Once you are on your way to having a solid deposit, you should do some research on websites like domain.com.au and realestate.com.au to understand what properties are worth in 2-3 suburbs.
When creating a shortlist of suburbs, look for locations that are close to transport, shopping centres and amenities. That way you’ll always be able to rent out the property for a good return and are likely to see capital growth. But make sure you steer clear of properties on a main road that don’t have easy access to transport.
Golden rule #3 Beware of interest only loans
If you’ve spoken to a family member or friend that has an investment property, you’ve probably heard the term “interest only loan” thrown around.
- Brief description: A standard home loan is when you repay both the interest and the principal (e.g the amount owed on the loan), whereas an interest only loan is when, for an introductory period of usually 1 to 7 years you only pay down the interest.
Interest only loans are an attractive choice for investors, as any interest you pay could potentially be claimed at tax time if your property is negatively geared and will also mean your repayments are lower.
However, interest only loans aren’t all they're cracked up to be. These days for the feature of only paying interest you’ll have to pay a premium, which we’ve found is roughly 40 basis points higher than if you were to pay both the principal and interest.So only go for this option if your cash flow is tight, as it’s a much wiser idea to pay down both the interest and principal in order to score that better rate.
Golden rule #4 Buy with your head
When the time comes to start inspecting potential investment properties, as an investor you should put your own preferences to the side and look for properties with the potential for capital growth that are likely to attract tenants. The property doesn’t necessarily have to be close to the CBD, but as we mentioned it does need to be in a good location and close to facilities.
Golden rule #5 Avoid buying at auction
Unless you’re really confident you’re going to get approved, buying at auction comes with a high risk attached - you could lose your deposit if you can’t gain finance.
When you buy in a private sale, you’ll get a 5 day cooling off period, which gives you time for the bank to value the property and sign you off with final approval. Whereas if you go down the auction route and find the bank won’t approve you for the amount you paid for the property you could land yourself in a minefield.
You will lose your 10% deposit and on top of this the seller could also take legal action if they can’t sell the property for what you offered.
So those are the 5 golden rules of investing for first timers...
Where to next on your investment journey?
Well it depends what stage you’re at. If you’re still doing your recon work and getting
an idea of what’s involved in property investment, read our in depth buying an investment property guide.Alternatively if you’re ready to track down the perfect investment loan for you:
- Visit our comparison section to compare deals
- Or get our home loan negotiators to haggle a great deal with the banks on your behalf by filling in your details here