INVESTMENT LOAN: Property is considered one of the more solid forms of investment and is the preferred investment class of many Australians.
Ryan Home Loans offers an abundance of information and experience that can help you if you are thinking of investing in property.
The big difference between property and any other type of investment is that you can actually touch it. It’s bricks and mortar, not just numbers on a screen.
It’s also considered one of the more solid, less volatile forms of investment. Investors tend to like property for its:
- Potential capital growth (increase in value).
- Ongoing rental return.
- Tax benefits.
You don’t need a big salary to get started
In addition to the income you receive from your job or business, Lenders consider the potential rental income you’ll get from the property when calculating how much you can borrow making property a viable investment option for first time property buyers as well as existing property owners. There are also many tax benefits associated with Property Investment and some of our panel lenders will also take these into account when assessing your borrowing capacity. An investment property loan could be within your reach.
If you already own your own home or have a reasonable amount of equity, you may already be in a position to purchase your first or subsequent Investment Property. Rather than saving for many months to raise a deposit you may be able to simply utilise the equity that you have created in your home as a deposit for the investment property.
If you don’t already own a property, it doesn’t necessarily mean that you cannot purchase an Investment Property. If you have a deposit saved, an Investment Property might be a good way to get into the property market. Whilst you may need to forego the Government Grants and Concessions that come with buying an owner occupied home, you don’t have to wait till you can afford somewhere that suits your needs. You may decide to continue to live where you currently reside and purchase an Investment Property instead.
Historically, residential property increases solidly in value over the medium to long term. While there may be dips and plateaus, if you’re in it for the long-term, property is generally considered a pretty safe option. Not only do you have the potential capital growth to look forward to, you can also get a steady stream of rental income from the moment you rent the place out.
The thing is, strong capital growth doesn’t often come hand in hand with high rental returns, and vice versa. That’s because the more expensive the property, the less the return tends to be. The properties most likely to have strong capital growth are in sought after, but pricey, inner city and beachside areas. While properties with a higher rental return are generally found in the cheaper regional and suburban areas.
For example: a 2 bedroom inner city unit might cost $650,000 to buy, but attract a rent of around $550 per week – a return of about 4% a year. While a 2 bedroom unit in the suburbs might cost only $300,000 but will get tenants paying $400 per week – a yearly return of around 6.5%.
So you should decide on your investment strategy before you even start searching for a property.
A capital growth strategy
Capital growth can give you the big wins in the long term. Some property investors have doubled their money after only a few years of ownership.
At the same time other investors have over-extended themselves and been forced to sell at a loss. Nothing is a sure thing.
Do the sums carefully. If you have high loan repayments you may see little return or even a loss for a few years. For some investors this is not a problem because they count on:
- The short term losses being greatly exceeded by the long term gains.
- the tax relief that comes with negative gearing.
Negative gearing is when the annual cost of your investment is more than your return. The Government offers you some tax breaks when this happens.
A rental income strategy
Opting for a strong steady stream of rental income doesn’t mean forgoing capital gains altogether – it just means your profit when you sell might not be as great as it might be for a different type of property.
A rental income strategy can work well if you don’t have to borrow heavily and keep your repayments low. It’s sometimes called positive gearing – so unlike negative gearing you won’t “lose” each week after paying all the outgoings.
Again you need to do the sums when deciding on your property and the price you’ll pay for it. The experts talk about the property’s “yield” as a measure of its return. Very simply it’s the percentage of the annual rent a property generates calculated against its purchase price.
To best work-out your actual return, you need to calculate the money in your bank account after all costs and taxes are sorted.
When deciding your investment strategy and what you can afford to spend, you should also consider the potential costs of ownership:
- Interest repayments – if you get a variable loan, factor in higher repayments if rates go up.
- Council rates and strata fees – the agent will tell you what these are per quarter but if you’re buying an apartment get a strata search so you’ll know if there are any big special levies in the pipeline.
- Repairs – if it’s a house you’ll be up for all the building repairs, but even in a strata block you’ll be responsible for repairs to fixtures and fittings and any whitegoods and appliances you include with the flat.
- Management fees – if you have the time and the inclination you can manage the property yourself, but if you get a managing agent count on paying around 5% of the rent.
- Insurance costs – if you purchase a house you’ll have to pay building insurance. It’s also a good idea to get landlords insurance which covers:
o Any damage done by a tenant.
o Your legal liability if a tenant injures themself.
o Lost rental income if your tenant moves out without paying.
When doing the sums, factor in rent-free/tenant-free periods. The experts say at least 4 weeks a year is a good rule of thumb.
Consider the risks
Like with any investment there is no guarantee that you will get a return. Property prices can drop and good tenants can be hard to find.
Do as much research as you can before deciding if property is the best place for your savings.
It’s a little easier to be rational about buying an investment property than buying a home. Since you don’t plan to live in it, you can inspect places with a more business-like eye.
If you’re looking for a place with potential for capital growth, the experts reckon you should aim for place close to the CBD, because scarcity and demand will ultimately push the prices up.
If you’re looking for a good rental return and a steady cash flow consider buying in the suburbs or regional centres. Prices in these areas are cheaper so you’ll get a better rental yield.
Whatever the investment strategy you follow, there are some general things to keep in mind when deciding where to buy:
- Try to avoid places on busy roads or directly under flight paths.
- Waterside suburbs appeal to both renters and future buyers and they tend to at least hold their value.
- You don’t have to buy somewhere close to where you live.
Unsurprisingly, making a successful investment in property means buying the right place, at the right price, at the right time. So when you’ve narrowed down the locations you’re interested in, research the state of the property market in those areas. Keep an eye on vacancy rates, sales prices and rental rates. Look at the interest in the area, the current population growth and the projected population growth.
There are lots of websites out there to help you keep up to date with property market statistics. Take a look at the price mapping tool on ninemsn’s Money site.
The type of property
Residential? Commercial? Or even a holiday rental? There are many of types of property to consider, but most Australians opt to invest in residential property because that’s the type they know best.
If you decide to go residential you’ll need to decide between a unit or house.
The plus points with a unit include:
- They tend to be cheaper and therefore provide a higher yield.
- The upkeep is managed by a strata company and if things go wrong the cost is split between all the strata owners.
- If you do decide to purchase a unit make sure you check the strata fees and council rates when doing the sums.
If you invest in a house:
- The extra land value can provide a greater chance for capital growth.
- There is good chance of finding a tenant as there are lots of families interested in having some extra room for the kids.
If you do decide to buy a house, be aware it can be a pain to maintain.
The features that will appeal to tenants
When looking at a property, put yourself in the shoes of your potential tenants. Think about what sort of people the place will appeal to most. The sorts of things a family will look for will be quite different to what a professional couple will be interested in.
For example, a family is likely to be interested in things like the property’s proximity to schools and the quality of its kitchen, while a professional couple might want to know about nearby cafes and the distance to a convenience store.
Some features will appeal across the board. Look out for places with balconies, internal laundries and parking.
To find out what is popular in the area you are looking at, talk to local rental agents and ask them about the types of properties in demand.
The past history
Before you enter into negotiations for any place, find out if it was rented in the past: how much it was rented for, if there were any vacancy periods, how long it was vacant for, and why.
Property investment loans are not too different from any other type of home loan. Like other loans you can choose fixed, variable or split interest rates and flexible features like redraws. But there are two types of loans that tend to be more attractive to investors.
- Interest only loans
- Line of credit loans
With most standard home loans your repayments combine the interest you owe on the principal amount you borrowed, plus a little bit of the that principal as well. In this way you slowly chip away at that original amount over the term of the loan.
With an interest only loan the principal remains the same. You only have to pay the original amount you borrowed when you finally sell the investment property (and hopefully make some capital gain).
This type of loan is useful for investors because:
- Your monthly repayments are less than they would be if you were pay off principal as well.
- You can get tax deductions on the interest payments, but none on principal repayments.
- It makes it easier to calculate the true returns from a property.
Line of credit
If you already own a property, a line of credit is a way for you to tap into any equity you have built up in that property and, use it as a deposit for your investment property.
A line of credit loan allows you to draw from a fixed amount at any time to pay for whatever you want. It’s kind of like a credit card with a big limit but the equity in your home acts as security for the loan.
Find the best loan for you
Like when choosing any other home loan, you need to compare rates, features, fees and charges.
Take a look at the Buyers’ Guide for tips on choosing the right type with the right features for you. Then talk to a good broker to get some advice.
When it comes to property investments and tax there are 3 main things to be aware of:
- Negative gearing.
- Tax deductions.
- capital gains tax.
Negative gearing is when the annual cost of your investment is more than your return. Basically, when the cost of maintaining your property and paying the interest on your loan is more than the rental income you get from it, you are negatively geared.
When this happens the government allows you to deduct the costs of your property from your gross income. So say your income is $60,000 a year but your property costs you $15,000 a year, you’ll only need to pay income tax on $45,000.
This way you’ll pay less tax, but don’t be mistaken, it is still a loss -just a smaller one – that hopefully will be more than made up for by the property’s increasing value. You probably won’t see a return on your investment until you sell the property, and only if it’s for a much better price than you originally bought it for.
Whether you are negatively geared, or getting a positive income stream from your property, you can claim expenses relating to your rental property for the period your property was available for rent.
All the following expenses can be claimed:
- Advertising for tenants, agents fees and commission.
- Interest payments and loan fees.
- Council rates, land tax and strata fees.
- Depreciation of items such as stoves, fridges and furniture.
- Repairs, maintenance, pest control and gardening.
- Building and landlords insurance.
- Stationery, phone costs and any travel to inspect the property.
The above is not a full list of what you can claim. Get proper advice from a tax expert before putting in your return.
Capital gains tax
What the Government gives with one hand, it takes with the other. Capital gains tax is a tax on the profit you’ve made on the property. So it’s based on the difference between what you sell it for and what it cost you (the purchase price plus anything you have spent on capital improvements or renovations).
Definitely get advice on what you might be up for when considering selling your investment property.
Managing an investment property generally means finding tenants, gathering rent and arranging maintenance and repairs. You can save yourself a bit of money if you do this yourself, or you can save a bit of time and have an agent do it for you.
If you decide to appoint an agent expect to pay around 5% of the rental income you get from the property. The upside is, once you have signed, there’s little more for you to do. An agent will:
- Find your tenants.
- Deal with their day-to-day needs.
- Provide you with a monthly statement that details all the income and outgoings associated with your investment.
Plus, an agent should know the system inside out – so you don’t have to do a crash course in tenancy laws and requirements.
Find a tenant
Depending on what you decide, either you or the agent will have to:
- Advertise the property, then interview and reference check the interested parties.
- Arrange the lease agreement.
- Lodge the rental bond with the appropriate agency in your state or territory.
- Get a written report from the tenant confirming the condition of the property prior to the start of the lease.
Deal with the day-to-day
Either you or the agent may also have to:
- Chase any missed rent payments.
- Arrange repairs and maintenance.
- Inspect and authorise any repairs and maintenance.
- Pay all bills, for example council and water rates and strata fees.
Whether you’re doing-it-yourself or with the help of an agent, take the opportunity to inspect your property regularly. A visit can reveal any potential tenancy or maintenance issues.
If you have further questions regarding investment property loans, contact our office on 1300 962 745.