Take a look at the possibilities

Are you thinking about renovating your home or applying for a loan to improve it?

Property investment has many benefits

• Property is a long-term, reasonably safe investment
• It is a visible, stable asset
• Renting income from an investment property can be enough to cover loan payments or other expenses.
• It can be sold in the future to reap capital gains
• You can increase your portfolio by building equity in your home-loan investment.
• You can get additional financial benefits from taxation and gearing
• You can offset expenses associated with investment property against income from rental. Additionally, you might be eligible to claim depreciation for assets such as furniture, carpeting, and whitegoods
• If you already have managed funds, cash, shares, or cash, investing in property could be a great way to diversify and reduce risk.

Understanding the risks

There are risks associated with any investment. Rent income may not be as high as you expected or the property’s value may drop. It is possible to not have access to your money as quickly, and you may be able earn better returns with a different type investment. To find out if an investment property is the right choice for you, speak to a lender specialist.

Are You able to afford an investment property?

After you’ve paid off your mortgage, your first home is now worth more. You feel a little more secure financially and are starting to wonder whether you can afford an investment property.

This question can be answered in a number of interesting ways that will help you decide whether this approach is right for you.

A financial strategy perspective

For many, deciding whether or not you can afford an investment property is a matter first of determining your priorities.

• What are the reasons I want to invest in property?
• How does this fit in my long-term financial plan?
• Which type of investment property should I choose: one that has high rental yields, or one that can be sold at a profit within five to ten years?
• Are you looking to add value to your property or are you looking to rent it out to tenants immediately?
• Do I want to purchase a house?
• What is the interest rate for my investment loan home?

These questions will help you to formulate your strategy and get you closer towards the answer as to whether or not you can afford the investment property that best fits your long-term goals.

A practical perspective

This is a list listing the costs you should be aware of before you become a property investor.

Deposit. A deposit of 20% is usually required to avoid paying LMI (lenders mortgage insurance) costs. Compare loans to compare mortgages. You may find a mortgage that has a loan-to value ratio (LVR), of up to 95%. This means you will need a smaller deposit.

Home loan. Other than repaying the principal amount borrowed, there are additional costs. You should also consider application and establishment costs, legal fees, valuation fees, and monthly or annual fees. LMI can be costly if your deposit is less than 20%. Then there are ongoing interest repayments on any amount borrowed. There may be additional fees, so make sure you read all the fine print before signing up for a loan.

Costs of purchase. Other costs related to the purchase are also important. Stamp duty is an additional cost that varies depending on where you live and the property’s price. The legal transfer of ownership costs ($650-$850), registration fee and cost of a lawyer or conveyancer are all important. You will need to have pest and building inspections done before you sell the property. This could cost anywhere from $500 to $1,000. Additional costs include title searches.

Fees for buyer’s agent. Increasing numbers of investors use buyer’s agents to help find and buy the right property. You will need to include your agent’s fees in calculations if you decide to follow this route. In general, buyers agents charge either a flat fee between $5,000 and $15,000.

Insurance. Builder insurance can protect your investment properties against fire, storms and theft, as well as other risks. Landlord Insurance also covers tenants who damage your property or fail to pay their rent. This type of protection is priced based on a variety of factors. These factors include the size and construction material of the property as well as the location of the property.

Fees for property management. While you can manage your investment property by yourself, most people prefer to hire a professional property manager to take care of their property. Property managers are responsible for organizing repairs and maintenance, screening tenants and holding open houses. Property management fees will cost you between 7-10% of your rent.

Maintenance and repairs. Your property will need to be repaired over time. Your property may need repairs. Taps can leak, fixtures and fittings will need to be changed, while some parts of your house or apartment might simply wear down from general wear and tear. It is important that you are prepared to pay for any necessary repairs or maintenance. To keep your property in top shape, you may need to call plumbers, electricians and builders. Because parts are less likely to break down, maintenance and repair costs are usually lower for newer properties.

Strata fees. You will have to pay an ongoing body corporate fee if you purchase a townhouse. These fees cover building insurance costs and maintenance expenses. They vary depending on the type and location of the building and the features it has. Before you buy a property, make sure you look at the strata fees.

Rates for council. Get in touch with your local council to get the average quarterly rate for properties of the same size. This amount can be added to your budget to calculate your potential return on investment.

Additional costs. Other costs.

• Accounting fees to assist you in calculating rental income and expenses for your tax return
• Pest control costs
• You will need to pay for the costs of a tenant moving out.
• If your property needs to be renovated to make it more livable and attractive to potential tenants, you will need to pay renovation costs.
• If you have to travel to inspect your property, or to oversee maintenance, you will need to cover accommodation and travel expenses.
• Land tax on investment properties is payable to the government
• Cost of connecting utilities and services to your property as a tenant
• Agents’ fees, legal costs, and advertising costs are all expenses that ensure the property is in great condition.

From the bank’s perspective

Once you have decided that an investment strategy will help you achieve your long-term financial goals and you feel you are able to afford your mortgage and other expenses without it negatively impacting your lifestyle, then you need to determine if the bank believes you can afford to purchase an investment property.

An investment property is still a popular way to invest in Australia. An investment property should help you increase your wealth and secure your financial future. However, there is a common misconception that property investment always yields positive returns. While this may be true for most cases, it is not a quick way to wealth. It is important to remember that the way you manage your investments will impact your ability to reach your financial goals. After taking into account the rental income and tax deductions, you may be surprised at how affordable an investment property is.

While investing in the property market may offer many opportunities for profit, it can also lead to information overload.

A homeowner buying an investment property is often a difficult decision.

An investment, unlike your primary residence, can provide you with steady rental income over the long-term. It also offers the opportunity to reap the rewards of capital growth.

Investors must be proactive. They need to be open to learning new ways to invest their money, and take the time to assess and understand their financial options. It is all about being able buy below market value and then adding value. It’s all about investing in real property that will provide enough cash flow to support your lifestyle and not impact your after-tax cash flow.

There are many factors that influence how much you can make back, just as with buying a house. How do you determine if you’re ready to invest? How much equity or cash do you need to start?

What are you looking to achieve financially?

People make the biggest financial mistake when discussing investment property. They don’t know what they want financially. While people have a general goal to make enough money to become financially wealthy or rich, they don’t know how much it will take to get there. They don’t know how much passive income they will need to live comfortably and quit their job, so they don’t have a monetary goal.

So, what are you looking to accomplish financially? Write down what you want without being too complex. It’s easiest to think about what you earn, and how much you can afford to live on that income. You can then make this your financial goal and adjust it accordingly.

Choosing the best property at the right cost

Real estate investing is often about capital growth. Choosing a property with a higher potential for appreciation is the most important decision you make. It is crucial to buy at the right price.

Real estate is not as transparent as shares. However, you can still purchase a property below its market value if your patience and knowledge are good. Do your research and find out the current market prices in your area. You’ll soon be able to determine what a property’s value. Then you will know when you spot a bargain. Avoid buying real estate in an unfamiliar area, especially if you’re approached by real-estate spruikers who are trying to sell you properties offshore or interstate. Many of these companies receive very high commissions, which can lead to the property being extremely expensive. We recommend that you contact another lender or us if you are uncertain about the true value of a property you are interested in. This information can be used as a powerful negotiating tool.

Although you may not be aware of it, lenders and mortgage insurance companies have valuable information about different property developments and locations. You should look into this data to help you avoid making the wrong investment decision. No matter what you do, don’t buy investment property solely for the tax deduction. Always focus on making the right investment decision.

An investment property is different than a property you intend to live in and build your own home. For each type of property you choose (house, apartment, duplex or duplex), there are different criteria. Real estate investing is all about capital growth. It is important to find a property that will increase its value at the right price.

It’s not unusual for this to take longer than expected. Sites like Australian Property Monitors can help you determine the potential growth of different suburbs. Do a first-hand survey if you’re thinking about buying an interstate property. These glossy property brochures and websites can make the area or buildings appear more prominent, cleaner, and more open than they actually are.

Take a look at:

• Renting income in areas with high property prices is higher than the rental income
• Recent sales prices will give you an idea about property prices
• The neighbourhood has high vacancy rates. Ask local agents for information about vacant rental properties
• Council or government plans – Are there any new zoning amendments planned or developments that could negatively or positively impact the property prices in this area?
• Neighborhood features: closeness to schools, hospitals, transport and shopping areas
• Estimated property maintenance costs
• Property layouts and features: Number of bedrooms, bathrooms, outside space, etc.

It is important to ensure that your rental income stream is steady. This cash flow will allow you to keep the asset affordable and generate income.

Different types of residential property, including houses, land and homes, can perform differently over time. A vacant lot, for example, will not generate rental income but can appreciate faster if it is located in an area of limited supply. A home unit may be more cost-effective than buying a detached weatherboard house. You might find higher rental yields in some areas, but it is important to do your research as these properties often offer lower capital growth.

Your property should also be suitable for the local demographic. If your property is close to a university, it will have more bedrooms than a large backyard that allows for children to play. A quieter street with a family home will attract more buyers than one on a busy street.

Calculate your numbers – Cash Flow reigns supreme!

Property investing is a proven way to build long-term wealth. It should be considered a medium-term investment. You will need to ensure that you are able to afford the mortgage payments over the long-term. You don’t want to sell your investment property before you are ready. If you experience financial stress, you might have to sell the property.

It can be very affordable to maintain an investment property once you have it. You earn rent and get a deduction on taxes for many expenses. Also, remember that rents increase over time so expect things will get easier.

Here’s an example of how much it could cost to buy an investment property. It is best to look at the costs of servicing the loan after-tax. This will allow you to put the price in real terms.

Purchase price of property: $500,000 Stamp duty and other costs: $20,000 Borrow: $520,000 Rental Income: $450/week

Ongoing Costs Interest Cost @ 5.0% p.a.: $26,000 Rates : $1,500 Tax : $804.00 (Calculate NSWexternalLink your land tax) Agents Fee @ 7.7% : $1,638 Insurance : $500

Total Costs: $30.422 Less Rent: $23,400 (450 per week x 52). Annual Shortfall: $7.022 Tax deduction: $3.160 (assuming a rate of 45%). Annual After Tax cost: $3.862 or $74.26 per week

This example shows that the cost to hold an investment property is $75 per week. This cost is easy to explain to me. For example, it could be a tank of gasoline or a few bottles of good wine.

Be aware of the taxes associated with property investment and include these in your calculations. A good property tax accountant can help you in this area as they can change over time. You should also consider Stamp Duty, Capital Gains Tax, Land Tax. You can expect to increase your rent in times when interest rates are rising.

When deciding whether to lend you money, banks will only consider 80% of your rental income. This is due costs such as letting fees or vacancy rates that you will incur. You might also consider this a rule-of-thumb for you. Contact us if you need assistance in calculating the cost of owning an investment property.

It is important to find out which banks will lend you money. You will most likely be in a situation where you have worked for several years and the banks are willing to lend you money. Before you begin looking at properties, you need to consider how much money they will lend you.

Have your done a cash flow analysis?

This is crucial because it’s sometimes easy to overlook the various costs you should consider:

• Rental manager fees
• Paying for insurance
• Council rates
• Possible body corporate fees
• If you own a townhouse or unit, there are maintenance fees

You need to analyze the costs of many things. Calculate your total income and expenses to determine how much each item will cost you in a week, month, or year.

How many properties can you purchase?

One property may seem like a good investment. You might consider buying properties that are cheaper, and then borrowing the remaining amount and deposit to purchase two or three more. You won’t be putting all your eggs in the same basket.

The investment strategy you choose and the level of investor activity will determine how many properties you buy. You will likely need multiple properties to reach financial freedom. While you may not be able to buy multiple properties at once, you might consider it in the near future.

Which investment strategy do you prefer?

There are many ways to invest.

• Positive cash flow properties (which I often talk about)
• Capital growth: Negative gearing
• Remodel to increase your property’s value
• Divide a property
• Do larger developments
• Buy and hold
• Purchase units

You have many options when it comes to investing in property. So you will need to decide what investment strategy is right for you.

Hire a competent property manager and let them do the job

A property manager is typically a licensed real estate agent who is an expert in their field. Their job is to manage your tenants and keep everything running smoothly. A property manager can provide ongoing advice, help you manage your tenants, and ensure that you get the most value for your property. The right agent can also let you know when it is time to review rents.

Property law and your rights as a landlord, as well as the responsibilities of tenants should all be addressed by the property manager. You should approve any incurred costs, except for emergency repairs, that the property manager will handle.

A property manager can help you find the right tenant and conduct references checks. They will also make sure that they pay their rent on-time. You should not interfere with tenants as there are laws that protect them. To ensure that your investment is protected, you should make independent inspections of the property. However, it is important to always check with your agent and give ample notice.

The good news? Your managing agent’s fee is typically a percentage rent paid. This cost is deducted from your lease and is tax-deductible.

Learn about the market and the dynamics of where you are purchasing

Ask around to see what other properties are in your area. They’ll tell you if one side is better than the other. To get the best information, I like to tell other agents that I’m looking at a similar property. Do your research and seek out professionals you trust. Independent information such as RP Data is a great source of information about average rents, property prices, demographics, and suburb reports.

There is a lot of information available online. If you are serious about investing over the next 12 month, and would like to chat by phone, we can start our relationship with a free RP Data Report.

It’s also a good idea for your local council to help you find out about any changes in your area. A significant development next to your property may make it more difficult to find tenants at the right price. Or, traffic may be reduced which may lead to an increase in the property’s value.

Choose the best type of mortgage for you

There are many options available when financing investment properties. Get sound advice as this can make a huge difference in your financial health. It’s surprising how many people waste too much time researching mortgages to save money. Instead of focusing their time on local real estate markets, where there are much greater gains, it is quite shocking. Some brilliant people have fought passionately with lenders to save a few bucks a month for their home loans, only to end up paying $100,000 more than the reserve price at an auction for a property.

While interest on an investment property loan can be deducted from your tax, some borrowing costs may not be immediately deductible. Knowing the difference could count. A trusted financial advisor can help you structure your loan properly. It is best to not mix up your investment property loan with your home loan. This will allow you to maximize your ongoing tax benefits and lower your accounting costs.

It will depend on your situation whether you choose a fixed rate loan or a variable-rate loan. However, it is important to consider both options before making a decision. Variable rates are cheaper over time, but choosing the right fixed-rate loan time and place can make a difference. Keep in mind that the rate rises with property prices. Property investors are likely to benefit from rising interest rates, which is good news as it means they can enjoy capital gains.

As this will increase the tax efficiency of your investment loan, most investment loans should be set-up as Interest Only (rather that Principal and Interest). You should consider flexibility when you apply for a home loan. An advantage of Interest Only loans for investment properties is the fact that your negative gearing benefit decreases with each repayment. An investment loan with the option to pay interest in advance, or an offset account is something you might want to consider.

Take equity from another property

A great way to purchase an investment property is to leverage equity in your home or from other property investments. Equity refers to the value of your home. This can be calculated using the difference in the property’s value and the amount you owe on your mortgage. If your home is valued at $750,000 and you still owe $250,000 on the mortgage, then you have $500,000 in equity. You can also borrow more money against your investment property by using equity from your home, which can increase your tax deductions.

Negative gearing

If the investment cost exceeds the income, negative gearing may offer property investors tax benefits. Australian law allows you deduct the costs of borrowing and maintaining a property from your income. You can only receive a tax benefit if your income is not taxable. Even though you may lose money on the property, this can be used to lower your tax liability on other income. But, you shouldn’t just buy investment property to take a tax deduction.

Do you want to buy used ones or new ones?

Both have their benefits. If you’re buying a property for the first time, you may be eligible to receive concessions or grants in some states. You may be eligible to waive stamp duty or receive a specific amount towards your purchase. You can also buy new, especially if you are in a specific market. This will allow you to design your house and receive a lot of depreciation as it is a new property.

But, I recommend speaking to your accountant to discuss your options.

Although new properties are great, they can also be very expensive. However, it is important to be cautious when buying a property from a marketing company as they may charge additional commissions. Determine the commissions and the estimated value of the property after construction. Before you move on, speak with local real estate agents.

Verify the age and condition

Even with negative gearing you might need to replace your roof or hot water service within the first few months to make a big difference in your profits and reduce your cash flow.

To avoid potential problems, it is a good idea to hire a professional to inspect your property before you buy.

A qualified tradesperson with adequate insurance and a license to perform the work is a wise choice.

You don’t always have to buy a property in peak condition. This is because you can improve the property’s value by fixing it up. This will increase your capital growth as well as rental income. You can’t do this when you own shares.

What kind of property will you be buying?

We need to first look at buying units. You will incur additional costs when you purchase a unit. These are called strata fees and body corporate fees. These fees can cause cash flow problems and make it difficult to control what happens. You may be an investor but there will also be owners and tenants of the units. These people will have different ideas than an investor who owns the unit.

When you invest in a unit, you could lose control of your spending. There are other issues you need to take into consideration when purchasing a home. Make sure to do your research before you make a decision about which type of property you want.