A beginner's guide to property investment
Interest rates are at an attractive level, which has led many people to look towards investing in a rental property. But before you make your first investment you'll need to decide on a strategy: property type, location, and how you're going to fund it.
You may think you don’t have the funds to buy an investment property but did you know that you can access the equity in your existing loan?
If you're ready to make the move into property investment, here are some important things to keep in mind.
There are many ways you can fund your property investment. Which one you choose is ultimately dependent on your personal circumstances.
For instance, you may have equity stored up in your current home loan. You can use this built-up equity to go towards purchasing another property.
This can be done by either using the equity to pay for the deposit of a home, or using it to borrow more funds.
You'll also need to decide what kind of loan to get, such as an interest-only or line of credit loan. Your broker can talk you through the options that would work best for you. Interest only loans are a good option for investors who want to achieve capital growth on their property over a shorter term - this means they're great for those with a negative gearing strategy. Through this loan, you'll only be paying off the interest and not the principal.
If you're planning on buying more than one investment property then a line of credit loan might be the option for you. This type of loan allows you to continually draw funds back up to the limit, removing the need to apply for additional finance.
Investment strategy: Negative and positive gearing
To have a successful investment you'll need to have a strategy in mind.
Negative gearing is when the ongoing costs from the property outweigh the rental income you receive. Some of these ongoing costs include council rates, maintenance, insurance and water. Many people choose to use this strategy because they can claim tax deductions for some of the ongoing expenses.
Once these claims have been made, you can reduce the amount of taxable income because you will have a smaller amount of rental profit.
Positive gearing is another common strategy used by investors. This is when the rental income is higher than the ongoing costs of the property - generating a cash flow.
Some investors use a mixture of both negative and positive geared properties in their portfolios so that the shortfalls of one can cover the other.
One of the biggest concerns in an investor's mind is that their property may sit vacant on the rental market. This problem can be helped by selecting a home in an area with a high population rate and a low vacancy rate. Look at areas where the vacancy rate is below 3% because this is a sign of rental demand.
At the same time, find an area that has steady growth in value, especially if you choose a negative gearing option as you'll need the growth in the long-term to offset the losses.
Worried about ongoing maintenance and repair costs? Find a property that's in good condition, as this will limit these costs. Another option is to find a property in need of renovation to add more value.
If you’re thinking about investing in property, get in touch so we can talk about your options.