When investing in property, you will likely be looking to make money rather than buy a home to live in. If you are investing in a property in Australia—a popular way to invest for Aussies—it is important to determine whether it makes sense for you and equally critical to know what to look for. The following is a quick checklist of what to look for when purchasing an investment property:
Have clear goals. Along with possible benefits, make sure to consider the reality of investing in property. You should know up front that you can make your loan repayments without negatively impacting your lifestyle and whether or not you are comfortable taking such a risk, like significant interest rate fluctuations or a potential drop in market value.
Research, research, research. You will need to research the amount you can afford to borrow with an investment loan if you are searching for a house or apartment in a specific area. You will also need to consider whether you are purchasing as a longer-term investment or to generate income in the present. Depending on that, you may want to research the home’s rental income, ongoing costs, and potential for capital growth.
Set a budget (that you can afford). Usually, a lender will require a minimum deposit between 10-20%, as well as money up front for things like legal and conveyancing fees, stamp duty, maintenance, insurance, and interest on borrowings. You will need to think about how your investment might be impacted by the cost of your borrowings, also taking into account your interest rate loan options and their possible fluctuations. A fixed-rate loan could be worth considering, since it will lock in a portion of the interest expense for a term.
Credit history check. Prior to inspecting properties, ensure the details in your credit history report are accurate.
Choose a property manager. You may want to consider appointing a real estate agent or property manager if you live far from your investment property or are time poor. Going this route, however, will likely cost you in property management fees.
Insurance. Building repairs, acts of nature, loss of rental income, and contents are a few things to consider. The cover and premiums will depend on the policy you take out and the provider.
Smaller costs. Ongoing property costs to consider include: water rates; strata fees; council rates; property management fees; repairs and maintenance; insurance, such as landlords’ insurance; estimated vacancy costs like advertising and lost rent; and other costs like land tax.
Investing in a property is usually viewed as being considerably less risky than other investments. Here are some advantages to investing in a property in Australia:
Less volatility. Compared to shares or other investments, property investment can be viewed as less volatile.
Income. If the property is tenanted, you earn rental income.
Capital growth. You’ll benefit from a capital gain when you sell—if your property value increases.
Tax deductions. You should be able to offset a lot of the property expenses against rental income, like interest on loans used to purchase the property.
Physical assets. You can touch and see what you’re investing in.
No specialized knowledge necessary. To make a property investment, you do not need specialized knowledge—unlike some of the more complex investments.
On the other hand, while investing in a property can seem fairly straightforward, there are disadvantages you may want to consider:
Cost. Whatever income you earn from renting might not cover your mortgage payments or other costs.
Interest rates. Higher repayments and less disposable income could result from a spike in interest rates.
Vacancy. If you do not have a tenant, you must cover the costs yourself.
Inflexible. You cannot sell off a bedroom if you need money fast.
Loss of value. You may wind up owing more than your property is worth if the value plummets.
High entry/exit costs. These include legal fees, real estate agent’s fees, and stamp duty.
Investing in a property—like all investments—can involve risks. Your property value could decline or the money you earn from renting might not meet your expectations. You could earn more returns on other types of investments, and you might be unable to access your money fast enough. To understand the risks, it is important to speak with a lending specialist to see if purchasing an investment property is the right risk for you.
Cost to buy and sell. The costs of investing in a property will likely include: search fees, legal costs, conveyancing fees, stamp duty, and pest and building reports. When selling the property, you’ll be on the hook for advertising costs, legal fees, and agent’s fees, as well as capital gains tax, if your property’s value has increased.
Borrowing money to buy. You’ll have to pay the property mortgage if you are borrowing money to buy. Do not relay on rental income to repay your mortgage, since there will be periods when your property is empty.
Costs to own an investment property. Among the ongoing costs of property investments are: landlord insurance; land tax; body corporate fees; building insurance; council and water rates; repairs and maintenance costs; and, if an agent is required, property management fees.
When choosing the right property to invest in, it is important to consider the following: the rental income versus the property price; property prices based on recent sales; vacancy rates in the neighbourhood; council or government plans; neighbourhood features like proximity to schools, transport, etc.; estimated property maintenance costs; and property features and layout, such as number of bedrooms and bathrooms.
