Are you toying with the idea of buying your first investment property? It can be a great way to make money and prepare for a financially secure future, but only if you get it right. There is a lot to consider when choosing an investor home loan, selecting a property, and deciding how much you can commit to financially.
Here we explain some of the fundamental things to cover off as you make this important decision.
Why buy an investment property?
The fastest way to grow your wealth is by investing it wisely, not by keeping it in a bank account with next to no interest or stashing it away under your bed.
Australian real estate is considered a relatively stable investment which, when done well, can generate very healthy returns. You can get cash flow from rental income while the property produces capital gains over time. And thanks to negative gearing incentives, there are ways to offset various costs in your tax return.
But of course it doesn’t always work out exactly as planned, which is why it’s important to do thorough research and get the right advice before committing to such a significant investment.
Before you buy an investment property
There are certain things you need to do before buying any kind of real estate; building inspections and pest control checks, for instance. But with a rental property you also need to ask yourself:
- Does the area have high demand and promising signs of growth?
- How much rental income can you realistically achieve, and how does this compare to your mortgage repayments?
- Will you still be able to afford your mortgage if your property is vacant for a while or the rental market slumps?
- Which type of investor loan is right for you? (More on these below)
- Have you considered all the risks and sought professional advice?
Types of home loans for investors
Just as with owner-occupier mortgages, you’ll find a range of different investor home loans on offer.
Interest-only loans are common among investors because they offer the lowest repayments. With this type of loan the repayment only goes towards paying interest, not reducing the loan principal. This can help with cash flow but will leave you in a sticky situation if your property loses value.
You’ll also need to decide whether you want a fixed or variable interest rate. Fixed rates are typically a little higher but remain in place for a term of 1-5 years. Variable rates can change at any time, affecting your repayment amount. You might consider a split loan which lessens risk by applying a fixed rate to part of the loan and a variable rate to the rest.
A mortgage broker will help you assess your finances and work out which type of loan is most suitable for your needs. You can also read more about different home loan options here.
Calculating your borrowing power
Before looking seriously at investment properties or applying for a loan, you need to know how much a lender is likely to let you borrow. This lets you focus your search on properties you can actually afford – and make offers that are within your means.
Your borrowing power is based on your income and expenses and the size of your deposit. There are various online tools that can help you calculate your borrowing power, and these can be a good place to start. However, a mortgage broker will work with you on a more personal level and deliver greater lifetime value than a free online calculator.
Get started on Monefly to connect with a trusted mortgage broker who can help you assess your finances and find the investor loan that’s best suited to your personal circumstances.