Buying an investment property

Buying property in Australia is a popular investment option, especially as house prices in recent years have increased. But investing in property isn’t for everyone, and despite the gains of recent years, investing in property doesn’t always deliver positive returns.

If you are thinking about buying an investment property, you’ll definitely need to do your homework first from understanding the market dynamics of where you should / will be buying, finding the right property at the right price, working out the true cost of your investment and finding the best investment home loan to suit you.

This guide will run you through some of the investment basics, but the Money experts here at Mozo strongly recommend you seek professional property investment advice before jumping in to property investment from your accountant, financial advisor or other property expert. Also check out our blog, which has some great articles from our in-house property expert, Steve Jovcevski on the pros and cons of property investment.

Note on buying an investment property with SMSF monies. There are different restrictions to buying property with funds in a self managed super fund. Check out these on the Australian Government’s MoneySmart website.

Right property, right price

Buying an investment property is different from buying a property in which you will live and want to build as your home. You need to have a different set of criteria for choosing the type of property (house, apartment or duplex) and the area (city or suburb) you buy in. Investing in real estate is about capital growth so finding a property that will increase in value at the right price is key.

Don’t be surprised if this takes longer than you expected. Use sites like Australian Property Monitors to discover the growth potential of different suburbs. If you are thinking of buying interstate be sure to do a first hand recce - those glossy property brochures and websites often make the area or buildings look bigger, cleaner and more open than in real life.

Look at:

• areas where rental income is high compared with property prices

• recent sale prices to give you an idea of property prices
• vacancy rates in the neighbourhood. Talk to some local real estate agents about rental vacancies
• council or government plans - are there any new zoning changes planned or developments that may negatively or positively affect the property prices in the area
• neighbourhood features: proximity to transport, schools, hospitals, and shopping areas
• estimated property maintenance costs
• property layouts and features: number of bedrooms, bathrooms, outdoor space etc.

Costs of buying an investment property

With an investment property you need to think about the initial costs of purchasing the property but you also need to carefully consider what your ongoing costs will be to manage and maintain your property. These are:

Buying:

• legal and conveyancing fees
• valuation fees
• pest and building inspections
• stamp duty
• downpayment
• depreciation schedule

Ongoing:

• property maintenance
• property management
• insurance
• council rates, water rates
• land tax
• body corporate fees (if applicable)
• interest payments (if borrowing to invest)

How much can I borrow for an investment property?

While investing in property has its many perks, there are some things you’ll need to keep in mind when looking for investment home loans.

In the past it was possible for property investors to have the minimal deposit of 5% of the property value, but recently, the Australian Prudential Regulation Authority has been putting pressure on banks to reduce their investment loans book. As a result major banks are beginning to put caps on the amount that investors can borrow and are generally implementing new eligibility which requires investors to have a full 20% deposit.

Here is the deposit amount you’ll need:

Property Value	500,000	600,000	700,000	800,000	900,000	1,000,000
Deposit	100,000	120,000	140,000	160,000	180,000	200,000

Knowing your budget

Before you start looking at potential investment properties and real estate websites you really need to run the numbers so that you’re fully aware of how much you can afford to spend and repay.

Mozo has free online calculators to help you:

• Budget calculator
• Borrowing calculator

Choosing the right investment home loan

If you’ve got the required down payment required, you’ll need to think about what kind of loan you’ll need. There are a range of options available for property investors and it is a good idea to crunch the numbers with all scenarios to work out which one will be best for you. If you’re still not sure, speak to a home loan expert here at Mozo to discuss your options.

Interest only home loans

Interest only home loans are popular with property investors as interest on a investment loan is generally tax deductible. With an interest only home loan your repayments will also be lower.

But keep in mind, interest only home loans aren’t for everyone. The whole point of an interest only loan is you’re relying on your property’s value to increase over time. This can be risky if you’re buying in an area that could see a drop in property prices down the track, so in this instance you may be better off paying down both the principal and interest.

Variable, fixed or split interest rate?

With investment loans, you generally have the same options of choosing between a fixed or variable.

Variable interest rate:

• wide choice of lender options
• generally cheaper than fixed rate home loans
• more features like an offset account and extra repayments facility

Fixed interest rate:

• not exposed to interest rate rises
• budgeting is easier as your repayments don’t change
• fix for up to 5 years

Some lenders will have the option of choosing a Split rate loan, where you divide your home loan repayments into a fixed rate portion and a variable rate. You can get the flexibility and features of a variable rate home loan as well as some security if your lender lifts rates.

Offset account

It’s a smart move to get an investment home loan which has an offset account. Any money in the offset account will reduce the amount of interest you pay on the loan and once you’ve built up the money in your offset account you can then access this and use it as a deposit for your next investment property.

Compare all home loans available in the Mozo database by clicking the link.

Investment Property Tax Deductions

With an investment property, Australian law allows you to deduct the cost of any interest you pay on your loan and maintenance costs from your total income. You can only get a tax benefit if you are earning other taxable income.

Negative gearing: is when the rental income from your investment property is less than your expenses (interest you are paying on your loan and maintenance costs).

Property depreciation: In addition to any loan expenses and maintenance, property investors can also claim depreciation on their property. Claiming depreciation on your property is one of the most important steps for any property investor as it can dramatically reduce your bottom line. Before purchasing a new investment property calculate the cost of depreciation with this depreciation calculator from Tax Depreciation specialists Washington Brown to see how much you will be able to claim off your tax.