A beginner's guide to property investment


Property investment is a popular way to build wealth over the long term. While you don't need special qualifications, you'll need to put your head above your heart and learn as much as you can about the ins and outs of the process.

To begin climbing that almighty property ladder, you need to have a logical and strategic approach. It’s not unlike taking a round-the-world trip. You’ll need to ask yourself a hundred and one questions along the way, choose the right ticket for all your intended pit stops, and stay switched on so you don’t get lost and end up off the beaten track! And, it definitely helps to have an experienced, fearless expert to guide you with their local knowledge.

To help point you in the right direction, we've put together this detailed beginner’s guide to property investment. As experts in Australian mortgage broking, Loan Market is your friendly, personal guide on this exciting expedition, offering insight and tips throughout every leg of the journey. You shouldn’t need to learn a new language to understand the property market so we’ve cut through the jargon and will make sure you understand all you need to know in simple terms.

In this guide, you'll find out about:

So, buckle up and ensure your seat’s in an upright position!

Is investing in property a good idea?

There are many ways to build wealth and achieve financial freedom. For a long time, buying land and property has yielded great results for many investors. But whether this approach is right for you depends on what you want to achieve and your individual circumstances.

Just as some people prefer a road trip down Route 66 and others would rather trek Kilimanjaro, no two approaches to property investing are the same and the path you forge should be your own.

Real estate is generally considered a good investment option. When you buy property, you can generate ongoing passive income and if the value increases over time then it’s a great long-term investment. Real estate can be a part of your overall strategy to start building wealth.

That being said, you need to make sure you are financially ready. Buying a home, apartment, commercial building, or piece of land is a big ticket purchase. For one, you will need to put down a significant amount of money upfront and manage costs ongoing. That’s not to mention the responsibility of maintenance costs, as well as the potential for income gaps if you end up between tenants for some time.

So, you’ll need to map out a plan. Here’s what you need to know about investing in real estate and if it's the right choice for you.

Buying your first home or investing first

Living in your own home means you're not creating any cash flow from the debt you've taken on to finance the purchase: your mortgage. In contrast, an investment property generates a rental income, so the loan could be considered a good debt. This is why some people chose to become rentvesters. They rent their home in a desirable location while also leasing out the property they own. When done right, rentvesting lets you live where you want to live while owning and paying off a property.

Rentvesting gives you a way to enter the market even as prices remain relatively high. And because the bank takes the rental income as well as your other income into account, you might be able to afford a property in a better area.

The rentvesting strategy takes into account the fact that great investment properties aren't necessarily those that serve your own personal needs. A smaller, cheaper property might not be your dream home right now, but it's affordable and it could generate rental income while achieving capital growth. There are potential financial cash flow risks with rentvesting, so we recommend that you seek personal advice from your accountant before acting on this strategy.

Why buy an investment property?

If you’re already a homeowner you might opt for an investment property for several reasons. You might be looking to realise capital growth while generating rental income to help cover some of the loan. Additionally, as a homeowner, you could secure a loan for your investment property without needing a deposit, without having to make a large financial commitment, or without having to pay lenders mortgage insurance if you borrow more than 80% of the property's value.

This is because you might be able to tap into the equity you've built up in your current home to secure the investment property loan. And as you pay off more of your investment property, you could subsequently use that equity to buy a third property or even use two properties to cross-collateralise to borrow for a third property.

Of course, there are many more reasons why you might consider buying an investment property - read more about some strategies you could use in our free guide, “Investment property strategies explained”.

Weighing up the pros and cons of investing in property

Bus, train or plane? Hostel, hotel or Airbnb? Duffle, backpack or suitcase? Before you jet off, you have to make many decisions. Some easy and some monumental. One option is not necessarily better than another, but one option will be better for you.

This is the part of your investment journey where you need to ask yourself the hard questions and figure out what works for you.

  • What are you hoping to achieve AND what’s your final
    destination?
  • Do the benefits outweigh the pitfalls AND how can you avoid a
    costly detour?
  • How do the risks stack up AND what’s the safest investment
    option for you?
As you decide whether or not property as an investment vehicle is the
right choice for you, consider the following:

PROS

Tax deductions

The ATO's tax deductions mean you could claim building depreciation as well as negative gearing if costs are more than the income generated by the property.

Ease of access

You don't need specialist knowledge or qualifications to invest in property. With some research and the help of a mortgage broker, you could find the home and loan
for you.

Good debt

The loan on an investment property could be considered as a good debt because you're buying an asset that generates rental income and potentially increases in value.

Growth and equity

The longer you hold onto the asset, the more capital growth you could realise and leverage to buy other properties.

Value over time

Property tends to be a safe investment, with an underlying asset that tends to increase in value over time.

CONS

Cash flow problems

A positive cash flow property could be hard to find unless you buy in a regional area and you could be covering a substantial part of the mortgage out of your own pocket.

Complexity and risk

It could be more complex and risky than you expect. Risks like unexpected vacancies, problematic tenants, and property damage could impact cash flow and be a headache to resolve. The property could have hidden problems.

Market trends

Though historically property prices have appreciated over time and through cycles, you have no guarantee of capital growth, and vacancy periods and interest rate changes can impact cash flow.

Liquidity

Property is far less liquid than other options like shares. In an emergency, you probably won't be able to sell in a hurry.

Upfront costs

Property is a major investment with ongoing costs and a large upfront outlay.

Grappling to find the answers to these questions? Still unsure about whether property investment is right for you?

Keep reading about the benefits and pitfalls of investing in property. One of our Loan Market mortgage experts can help provide you with personalised loan advice, but we also recommend that you seek personal advice from your accountant before acting on this strategy.

Want to know if investing in property is right for you?

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Your investment itinerary: formulating a clear plan

It's essential to have a well-articulated plan in place before you decide to invest in a property. A plan helps you focus on the short and long term, identifies your risks and ways to manage them, lays out what you need to do to achieve  your goals, and benchmarks how you're doing.

Step 1

Review your current financial situation, including what you own, what you owe, your income and your outgoings.

Step 2

Clarify your goals, set time frames, and check how much risk you're happy to take on. Remember, while property is considered a safer vehicle, any type of investment has risks.

Step 3

Work out what type of property would best help you achieve what you want to achieve from property investment, whether it's high capital growth, low vacancy and healthy cash flow, renovate to sell, or something else.

Step 4

Explore how to budget for property purchase, ownership, and ongoing maintenance, and seek the advice of professionals like accountants.

Costs of investing: get to know your numbers

While no one likes wearing a travel money belt lumped under their clothing, a smart traveller knows that protecting their money and budgeting correctly comes above all else.

No ones wants to be pickpocketed and left without their Visa/Mastercard, kroners, yen or dirham!

So, how can you keep your cash safe?

To climb the property ladder you need to know your numbers, and while your emotions might run high at times, you should keep a level head and think practically. So, let’s dive into the costs of investing, look at what calculators you can use to work out whether it’s financially right for you, and see how you’ll keep track of all these expenses.

One-off and ongoing costs

On top of your deposit (usually 10% or more of the price), initial costs could include loan application and valuation fees, conveyancing and legal fees, stamp duty, and lenders mortgage insurance. The stamp duty is a tax on your property and it’s one of the biggest one-off, upfront costs you'll need to pay. How much you pay in stamp duty costs of investing in property and the price of your property. You can use this stamp duty calculator to work how much you'll be paying.

You might need to pay lenders mortgage insurance if your deposit is less than 20% of the purchase price. Other one-off costs include legal or conveyancing fees, building and pest inspection fees, and connection fees.

Ongoing costs for maintaining an investment property include building and landlord insurance, land tax, and council rates. Along with yearly mortgage fees, mortgage repayments, and utility bills, you might also pay strata fees, rental management fees, and repairs and maintenance costs. In addition, if your rental income exceeds the cost of owning and managing your property, you'll likely be paying tax on this income.

Other costs include advertising for tenants, cleaning costs, gardening and gutter maintenance, property agent management and letting fees, and service fees if you use an accountant.

Learn more about the one-off and ongoing costs of investing in property in our straight talking guide to investment property costs.

Crunch the numbers

Ideally, you'll consult your financial advisor and mortgage broker before, during and after your purchase, but you should also be able to do some of the numbers yourself. Using a range of home loan and mortgage calculators could help simplify the process, helping you figure out things like:

Other calculators to use include the Where Can I Buy Calculator and the budgeting and saving calculators.

Calculating rental yield

Rental yield is an important number. The rental yield is a measure of how much cash, through rental income, your property produces each year against the asset's underlying value. It's given as a percentage of the value. Two types of rental yield are used: gross and net. Gross rental yield doesn't account for ongoing costs while net rental yield does.

The gross rental yield is calculated as follows:

Annual rental income (weekly rental income x 52) / property value x 100

The net rental yield is calculated as follows:

Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100

Annual expenses can include things like mortgage payments, council rates, and management fees. As a general rule, anything above 8% could be a good rental yield.

Learn more about how to calculate rental yield here.

Understanding negative gearing

Negative gearing can be a significant consideration when it comes to working out the numbers on your investment. When you offset the income from your property against the expenses, the property might be losing money in the immediate sense even if the property is releasing capital gains in the longer term.

The ATO lets you offset this loss against your other personal income, like your salary. This lowers your taxable income and helps you save on your tax bill and in effect raises your rental returns. There are also potential financial cash flow risks with negative gearing and you should seek personal advice from your accountant before acting on this strategy.

Understand more about negative gearing by contacting your Loan Market broker who can help you start your negative gearing journey.

What's considered a good return on your investment?

A few different metrics are used to measure return for property. You can use ROI, which is as follows:

ROI = Annual rental income/Total cash investment

Example:

You buy an investment property for $800,000 and pay another $30,000 in upfront costs. Then you charge a monthly rent of $2,500. What is the ROI for this income property?

ROI = 12 x $2,500/($800,000 + $30,000) = 3%

When it comes to what's considered a good percentage range, it will depend on factors like the size of your property, location and risks. For example, 6% might be good for some properties while what's good for other types of properties could be much higher.

Capitalisation rate is another metric, typically used for commercial property, and is the rate of return on an income property based on the net operating income (NOI). The formula is NOI/Price, and anything above 8% could be a good return. You could also use the cash on cash return, which is calculated using this formula: NOI/Total cash investment.

As a general rule, anything above 8% could be a good return. Before relying on these calculations, always speak to your Loan Market broker and accountant to find out more.

Ways to improve rental yield

Little things could make a big difference when it comes to improving your rental yield. Try furnishing the space, installing solar panels, and including temperature control systems. Extras like dishwashers, a second bathroom, extra bedrooms, entertainment areas, and car parks can be huge bonuses for tenants. Storage areas, security features, WiFi, and retractable clotheslines are also good rent boosters.

Keep up with general maintenance on core elements like electricals and plumbing, and fix broken roof tiles and windows as soon as possible. Update paint, carpeting, alarm systems, and fittings to keep tenants happy. Small details like great photography, cleanliness, and immaculate gardens can help you build trust and attract tenants.

Property investment returns trends

Overall residential property returns have been declining in the last year or so. Capital growth continues to be much stronger than rental returns, so as an investor, you might do well to expect the majority of your returns to come from capital gains rather than rental income. Also note that returns vary from city to city and from regional area to urban area. By familiarising yourself with the trends, you can adjust your investment strategy accordingly.

Tired of crunching numbers?

Get help from a Loan Market broker today.

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How to choose the right loan

We’ve reached one of the more complex parts of the investment journey: home loans. This is where you’ll really benefit from the local expertise of a Loan Market mortgage broker who can help you find the right loan for you.

You might think all property loans are the same, but they come with different features and options. You'll want to find the right loan for your specific needs by considering the different options, add-ons, structure, and terms and conditions available.

Features your investment loan needs

Principal-and-interest loans are the most common type in Australia, and with this type of loan, your repayments go towards paying down both the amount you borrow as well as the interest charged. You could opt for an interest-only loan, which means you could be paying interest only for the first one-to-five years of your mortgage. This frees up cash flow in the early years before the principal repayments kick in, which you could use for renovations and other expenses.

Loans can be fixed or variable, with the former having interest rates fixed for an initial period. Alternatively, you could opt for a split home loan, which is a hybrid fixed and variable home loan that could protect you from interest rate hikes while letting you save when rates fall.

A line of credit loan could be useful if you want easy access to the equity you've built up in the property. This type of loan has a withdrawal facility, letting you make withdrawals much like a credit card. Similarly, a redraw facility lets you access extra repayments you've made if you find you need extra funds.

An offset account is another feature to look out for. This type of add-on lets you offset your mortgage with the savings you keep in the offset account, thereby reducing your interest payable.

Brush up on your loans with the loan-type cheat sheet and find out more about what features your investment loan needs in our quick guide. There are so many different loan options, always seek professional advice from your Loan Market broker before purchasing any loan product to ensure you have the right loan for you.

How to apply for a loan

Step 1: Have a chat with your mortgage broker

Firstly, you’ll need to have a chat with your mortgage broker to work out your borrowing capacity. This is how much the loan provider will lend you and different lenders may give you different amounts. Your borrowing capacity is based on your income, dependents, expenses, and other factors like credit card limits, property value, type of loan, and existing assets. Use a borrowing power calculator to get an estimate of how much you could borrow, and use a repayment calculator to find out what your repayments likely will be. A mortgage broker talks to lenders daily and knows the right questions to ask to help you maximise your loan capacity and borrowing options.

Step 2: Calculate your costs

The next step is to work out the deposit, loan, and purchase costs. If you don't have 20% or more saved up, you could consider other options like having a guarantor, paying mortgage insurance, and accessing equity in other assets.

Step 3: Understand what’s possible

Next, you'll look at suitable loan products. At this stage, we recommend that you work with a mortgage broker if you aren't already. The mortgage broker will help you compare rates, decide on features, consider fees and charges, and explore the implications of each cost.

Step 4: Apply for pre-approval

Once you've found a suitable loan, you can apply for pre-approval - this is also known as conditional approval. You'll need to provide evidence of income, expenditure, assets, and liabilities and a Loan Market mortgage broker can assist you with the paperwork. This can be in the form of payslips, a written budget, and savings account statements. After you're pre-approved, you can start looking for the right investment property.

Step 5: Let’s make it official

Having found the right property and conducted the right checks and inspections, you can make an offer (or bid at auction). Upon acceptance, your mortgage broker will help you submit your formal application with your chosen lender - this is also known as unconditional approval. Once it's approved, you can proceed onto settlement and take ownership of the property.

Repaying your loan: the process

Your repayments will depend on the type of loan you get. With a standard loan - a principal and interest loan where you're paying off both interest and the principal component of the loan - you'll pay an amount based on the loan term (fixed) and interest rate (fixed or variable).

And if a variable interest rate applies, your repayments will be higher or lower depending on any changes in the interest rate, while the loan term stays the same. If a fixed rate applies, you'll pay the same amount each month for the period the rate is fixed.

To estimate how much your loan repayments will likely be, use a repayment calculator. You can find out how much goes to repaying the principal versus interest with a principal and interest calculator.

The finer details

Let’s avoid some common mistakes and turbulence on your investment journey by smoothing out some of the finer details.

The success you achieve with property investing could come down to timing, strategy, and location. Adopting the right investment strategy, choosing the right property, and effective property management could drive your wealth-building goals forward.

Is now a good time to invest in Australian property?

Australia’s population growth rate continues to increase which means the property market should also grow over the longer term, but some buyers have been delaying buying property due to the risk of rate hikes. Given varying population growth rates in different areas and variations in housing prices depending on the region, the question might not be so much about trying to time the market but whether you're finding the right property.

For example, population growth rates and supply in the area could be the deciding factors when it comes to the question of a good investment, possibly more so than timing. Additionally, the property market rarely has perfect conditions for investors, so trying to time the market can be a futile exercise.

Common investment property strategies

The top three strategies for property investing are capital growth, cash flow, and flipping.

Capital growth

This strategy aims to build wealth through capital gains rather than rental income alone. Some experts suggest this strategy is better than high yield or cash-flow-focused strategies because capital growth tends to build more wealth over time than high rental yield.

Choosing the right property at the right price could be part of this type of strategy. Negative gearing, where your losses can be offset against your personal income for a tax saving, could also be part of this strategy.

Cash flow

The cash-flow strategy means you're looking for properties with high rental yields, usually high enough to help cover your ongoing expenses. Thought these types of cash-flow properties are cheaper to buy and hold, they're associated with lower capital growth.

Flipping

The flipping strategy involves buying a property and selling it quickly for a profit rather than buying and holding for the long term. The profit could be from capital growth and renovations and other improvements.

Brush up on your loans with the loan-type cheat sheet and find out more about what features your investment loan needs in our quick guide. There are so many different loan options, always seek professional advice from your Loan Market broker before purchasing any loan product to ensure you have the right loan for you.

How to choose a property

Buy the right type of property for your strategy type, and choose an area with strong potential for capital growth. When looking for the right property type, search for one that's in demand in the area, and understand your target tenants. Look for proximity to amenities, check current market rents, and consider your own budget.

Choosing a high-growth suburb could help you attract better tenants, boost cash flow, and/or achieve more capital growth. Research high cash flow areas, and explore different guides to find out more about growth, returns, and yields for suburbs.

How to manage your investment property

Keeping your property in good condition could allow you to attract better tenants. Vetting tenants is also crucial, so ensure they don't have a chequered rental history, with warning signs like late payments and damage by checking tenancy databases like TICA. Stable income is also important. In addition, attracting the right tenants is a surefire way to minimise maintenance costs, reduce wear and tear, and have someone look after the garden.

You might want someone else - a property manager - to manage your property, and it could be the best way to ensure you attract the right tenants. Look for a healthy property-to-manager ratio so your property manager isn't stretched too thin. A number less than 200 could be a good rule of thumb.

Consider what services they offer and how they screen tenants, how often they do inspections, and the level of detail in their inspection reports. Review references and testimonials, and test their property management knowledge. Finally, consider how quickly they're happy to get back to you and ask them about their property marketing strategies.

Get started with Loan Market

Property investing could be the wealth-building strategy you're looking for, and the key to success lies in research, getting informed, and working with experts. To find out more, explore Loan Market's website for more tips and insights on everything covered in this article.

And when you're ready to invest, Loan Market, as an award-winning industry leader in the mortgage brokering space, can help you to find the right property investment loan for you. Loan Market is a family owned, Australian company with brokers across Australia and New Zealand - we’re ready to work for you. Contact us today.

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