There are many different strategies you can employ for wealth accumulation. One of Australia’s favourites has always been property investment.
If you were one of the tycoons who loved wiping out their family members on the Monopoly board, chances are you might have a thirst and even a skill for it.
But doing it in the real world requires a lot more preparation and comes with a few more traps and tricks than just rolling a double to get out of jail!
Cash or equity for property investing
To get started on your road to property investment, you are going to need cash or equity.
You won’t be able to take advantage of any free kicks available to first home buyers.
Unless you’ve just won the Lotto or come into an inheritance, it’s probably not going to be cash.
But because you are likely already a homeowner, you can use the equity you have in that property to purchase an investment property.
Banks will normally lend you up to 80% of the value of your home, minus what you still owe.
Here’s an example for someone that owns a house worth $1,000,000 and wants to invest:
Value of your house: $1,000,000
Value of your house at 80%: $800,000
Value of your mortgage (what you still owe on property): $500,000
Equity available: $300,000
The Rule of Four
This is a good guide to predict how much you can spend on your investment property. Banks will generally multiply your available equity by four, meaning the maximum purchase price for your investment property is $1,200,000.
Banks will then lend you 80% or $960,000 for your investment property, requiring you to lay down $240,000 as the deposit.
Stamp duty, legal fees and other costs will generally swallow another 5% of your investment property price – that’s another $60,000.
It means for a $1,200,000 investment property, you would need to find $300,000. That’s a $240,000 deposit plus $60,000 costs.
Tax advantages
Even if the investment property you purchase is less than $1,200,000, it’s wise to borrow as much as you can with your investment loan because the interest payments are tax deductible. Interest payments on your home loan are not.
It’s also better to make the investment loan interest only so you can concentrate on paying the principal off your home loan.
Cash flow
So you’ve got cash or equity. That’s great. You’re also going to need cash flow.
Lenders are rightly very conservative, especially so when it comes to investment properties.
And while you may argue that a tenanted property will pay for itself, you’re going to need to prove you can meet mortgage repayments in worst-case scenarios.
That means banks won’t take rental payments into account.
They will also calculate your ability to service both your house and investment loans paying off principal and interest, even if you only intend to meet interest payments on the investment property.
And they’ll want to be satisfied you can continue to do so against a climate of rising interest rates.
Timing it right
This is basically the common-sense rule.
No-one can see into the future but you need to consider how it is shaping.
Are you thinking about switching jobs or careers?
Are you planning to start or grow your family?
Stability is extremely important to lenders and if the answer to either of those questions is YES, it’s probably better to wait until you can make such a big decision with more security and surety.
Determine your property investment goals
If the lights are all still green, it’s time to think about your strategy.
There are several different ones you can employ when investing in property.
Consider which best fits your long-term investment goals.
Buy and hold – The most popular option is to buy a property and rent it out with the view to keep it for a number of years.
Renovate – Many people love to buy a property, renovate it and sell it for a quick profit.
Wholesaling – Wholesalers buy a property and then sell it to a new customer for a profit within a specified number of days. The wholesaler essentially acts as an agent for the property.
Balance the books
If you’re determined to invest in property, you’ll need to be good at managing money and budgeting.
The bills will come flying in on your new investment, and hopefully so will the rental income or profits.
You’ve got two loans now so you’ll need to budget carefully, tightening the pursestrings in the short term for the long term benefits.
Surround yourself with qualified property and finance professionals
As a brand new property mogul, you’re going to need professional help and great advice.
You’ll want to contract everyone from real estate professionals and building inspectors to trusted tradies and even cleaners.
But the first place you should start is an experienced mortgage broker.
Calder Finance Broking are experts in the business and can do the heavy lifting for you, when it comes to establishing and maintaining your property investment goals.
We will also ensure you are on the very best loan deal possible.
We pride ourselves on leading our clients into the future with structure, financial stability and confidence.
Contact us today to get started or discuss all of your finance needs and concerns.
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by Hayley Walsh from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.
