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Here’ are six things to know before buying an investment property, from planning where and what to purchase, through to financial and tax considerations.
It’s important to understand that the housing market is generally considered cyclical, and can be a rollercoaster ride of highs, lows and steady patches. If you can hold on to your investment for a full cycle – typically seven to 10 years1 – you may see the value of the property increase considerably, or even double1.
The more you know about the industry, the better equipped you will be to make a good decision. Read property-related articles from reputable industry bodies, search online for both rental and sales opportunities and data, and talk to people in the know.
Find out average rental yields, what infrastructure is in place and/or planned, and the growth in value that has been experienced and is predicted for different locations.
Also, consider your goals, risk threshold and any possible outcomes. For example, you might find the perfect long-term tenant but you could also have a high turnaround. How would you cover the loss of income and increased property agent costs in the latter scenario?
When looking for the perfect investment property, remember that the location and style of the home must suit your target tenant. Will it be a one-bedroom inner-city apartment, a share house in a student area, or a family home close to parks and schools? Is it in a safe neighbourhood?
If your target tenant is a student or young city dweller, for example, you may want to consider whether the property is handy for public transport, shops and cafes. Remember, you can always renovate, but you can’t change the location of your property.
Also keep in mind what might attract buyers if you want to sell in a few years. Will the property’s style, layout and location still be appealing?
Negative gearing has been seen as a boon for property investors in recent years. That’s because when your loan repayments, fees and other related property costs exceed your rental income, you can offset the net loss against the rest of your income, reducing the amount of tax you owe.
A positively geared property means that the annual rental income received covers or is higher than the annual loan repayments and costs. This can provide a steady income for investors from the get-go.
If you already own property, you may be able to tap into the equity to fund your investment property. For example, if your home is valued at $850,000 with $250,000 owing on the mortgage, your borrowing capacity for another property may be considerably higher, provided you can comfortably afford the repayments.
Depending on your situation and current investment portfolio, there are a range of home loan options for you to consider. Will you go with an interest only or a principal and interest loan? Fixed or variable rate? What features would you prefer?
A qualified mortgage broker will be able to use their industry knowledge and experience to help tailor your home loan to suit your needs.
Buying an investment property should not be undertaken without thorough research and assessment. You want the investment to work for you now and in the long-term, so take time to seek advice from a reputable, licensed professional, such as your accountant or financial planner.