Is buying an investment property the right choice for you?
Property, much like gold, seems like a safe haven for investors: it’s an asset that is widely seen as something that could secure your financial future.
In many cases, an investment property should do just that, as well as assist you in reaching your financial goals.
However, it’s important to be aware that investment properties do not always deliver positive returns.
If you are considering becoming an investment property owner, here are 5 points to keep in mind.
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1. Have an investment strategy
Having a solid strategy for your investment is key! There are many property investment strategies to choose from. Two examples are:
- Negative gearing
- Buy and hold
Negative gearing refers to a property investment where the annual expenses exceed the rental income. The investor is left with a loss which can be claimed as a deduction against their taxable income.
Buy and Hold is where you purchase a property that appreciates in value over time.
Tenants pay rent which helps you pay off the mortgage. The buy and hold strategy is proven to be a great strategy and is one of the easiest ones to implement. Essentially, if you hold your property for long enough, you will be able to draw on the equity it creates over the years you own it and purchase another property.
2. Does your strategy involve capital gain or rental yield?
Deciding what kind of income you would like to earn from your property plays a major part in purchasing an investment property.
The two main options are capital gain and rental yield.
Capital gain is a long term investment option. You purchase a property and then sell it in the future at a better price. You are in it for the long haul as it will take a number of years before you will benefit from this option.
Rental yield relates to renting out an investment property. It measures the ongoing return on your investment property. It shows how much income you generate from that property as a percentage of the property’s value.
Gross rental yield is your annual rent income divided by your property’s value, while the net rental yield takes into account all total expenses such as stamp duty, loan fees, repairs and maintenance, management fees, insurance costs and many more.
3. How much can I borrow?
Once you have considered your strategies and priorities it’s time to seek approval for a loan for your investment property.
An investment loan is a mortgage designed for those who want to buy a property with specific intention to rent it out and receive income from it.
To help your find out how much you can borrow, the InfoChoice Borrowing Power Calculator uses your current income and existing financial obligations as a guide to give you a quick estimate of how much you can borrow and what your monthly repayments might be in the current home loan market.
4. Know what budget you have?
When it comes to being a landlord it is important to focus on your expenses and the ongoing costs of maintaining an investment property.
We have listed a few below.
- New tenant letting fee
- Building and landlord insurances
- Rental management fees
- Council rates
- Water bills
- Strata Fees (body corporate)
- Any maintenance and repair
Vacancy may be a particular concern. If your property is left vacant for an extended period of time, you will need to still repay your loan even though the rental income isn’t coming in.
There are many benefits and disadvantages to investing in property in Australia. Weigh these up before making your purchase.
This update is not financial advice. This article is general news and information.
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