How to buy an investment property

Property investing is a popular way to grow wealth in Australia. Investment properties can deliver consistent returns over time, demand is usually strong, it creates a passive income from collecting rent, and there are plenty of tax-friendly incentives. 

But an investment property is an investment at the end of the day. That means there’s some homework to do before applying for an investment home loan and signing on the dotted line.

As with buying a principal place of residence (PPOR), you’ll usually need a 20% deposit to buy an investment property. 

If you do have less than a 20% deposit, meaning you’re borrowing more than 80% of the value of the property, you might have to pay for lender's mortgage insurance (LMI). 

Deposit amounts according to property value

There’s plenty to consider when buying an investment property. From the costs associated with buying and selling, to factors like location, and whether you’ll take on the services of a mortgage broker.

What are the costs of investing in property? 

There are a lot of costs that come with buying property. These can be broken down into three main categories: 

1. Buying and selling costs 
2. Mortgage repayments
3. Ongoing fees.

When researching properties, make sure the income you expect to receive from renting it out is enough to cover these costs. Otherwise, you run the risk of defaulting on your mortgage and needing to sell. 

Buying and selling costs

When buying an investment property, there are a few big up-front costs that you’ll need to pay. 

These will have an effect on your overall returns and can include:

• Stamp duty 
• Conveyancing fees 
• Legal fees
• Building condition reports
• Mortgage broker fees.  

There are also fees associated with selling your investment property, like agent’s fees, and capital gains tax if your property value has increased.

Mortgage repayments

Aside from the fees that come from buying and selling, there’s also the matter of loan repayments. 

If you’ve borrowed money from a lender to fund your investment, you’ll have mortgage repayments to make. 

While you might be planning to rely solely on rental income to cover your repayments, that isn’t always a safe bet. If your property is empty for a period of time, you’ll still need to come up with the money to pay your bills. 

Plus, with fluctuating interest rates, you might need to consider refinancing your loan at some point, or using a home loan repayment calculator to work out if you can switch and save. 

Ongoing fees 

The ongoing fees that come with owning a property often get overlooked amid the talk of interest rates and repayments. 

These fees will differ on a state-by-state basis, but will generally include: 

• Council rates 
• Water rates 
• Building and landlord insurance
• Body corporate fees 
• Land taxes 
• Agent fees 
• Maintenance costs. 

How to choose an investment property 

It’s not just about ‘location, location, location’, although that is a big consideration. You’ll also want to look at the type of property you’re buying and its features. 

Choosing the area to buy in

Doing your research is critical to making a solid property investment decision. So, make sure you take the time to research the suburbs or regions you want to buy in. 

Look for a few positive indicators that may suggest an area has potential for your investment. For example, you’ll want to search properties in areas that:

• Have high demand for rentals
• Have a low level of rental vacancies 
• Are high-growth markets 
• Have an increasing population
• Provide access to public amenities 
• Are close to jobs 
• Are close to good schools
• Have a low crime rate 
• Are close to public transport
• Have proposed infrastructure or planning developments. 

While you won't always find a property that ticks all of those boxes, they're good guidelines to consider. 

Choosing what type of investment property to buy 

When choosing a property for your investment, you’ll want to find one that meets the demands of potential tenants in the area. 

There are family-oriented areas and areas that house a lot of young people, so the needs of these demographics can be different. 

It’s therefore important to do a bit of research to see if your prospective investment property might cater to the needs of tenants in the area. 

Considerations should include the type of property (house, apartment, etc.) and the features of said property. 

These value-adding features could include: 

• A garage 
• A second bathroom 
• Number of bedrooms 
• A backyard 
• Security features.

Once you’ve got your deposit saved, you’ll need to think about what kind of investment loan you’ll need. There are a range of options available to property investors, so it’s a good idea to consider the key features of each option and crunch some numbers to work out which loan is best for you.

Interest-only home loans 

Interest-only loans are often popular amongst property investors due to their generally lower monthly repayments. These repayments, made up of only the interest charged on the loan, may also be tax deductible. 

However, long term, interest-only loans can result in a much higher mortgage by the end of it because you’re not paying down the principal amount borrowed. 

It’s worth doing some maths, or using a repayment calculator, to work out the total amount you’re likely to pay by the end of your mortgage or the difference between principal and interest, and interest-only loans. 

But keep in mind, interest-only home loans aren’t for everyone. The whole point of using 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 rates? 

When it comes to investment loans, you’ll usually have the choice between fixed rates and variable interest rates. 

Variable interest rates: 

• Wide choice of lenders 
• Generally can be cheaper than fixed rate loans 
• Can include more features like offset accounts and extra repayments facility 
• Exposed to interest rate rises 

Fixed interest rates:

• Not exposed to rate rises for the fixed term 
• Budgeting is easier due to consistent repayments 
• Fixed for up to 5 years 

Split interest rate loans

Split interest rates are when you divide your home loan repayments into a fixed rate portion and a variable rate portion. 

You can get the flexibility and features of a variable home loan, as well as the security of a fixed rate if your lender increases their rates.

Offset accounts 

One way to reduce your repayments is to consider a loan with an offset account. 

Offset accounts are like an everyday bank account that is linked to your loan. Any money you keep in that account can be offset against the principal of your mortgage, reducing the amount of interest you pay.

Making sure you’ve done your due diligence when it comes to finding the right property, calculating your expenses (including loan repayments), and working out what features you want from your mortgage, it’s time to compare investment loans. 

When you compare with Mozo, you’ll see a list of investment loans from our featured lenders, with interest rates and an estimated monthly repayment, based on your loan amount and length. 

Keep an eye out for any deals, like cashback incentives, and a brief overview of the product’s major features. 

Check out some of the featured investment property loans below, or browse through the best home loans in Australia – the winners of the 2023 Mozo Experts Choice Home Loan Awards^.