Before you sign on the dotted line with a lender, gather as much background information as possible. Everything from your own financial position, to the type of property you’d like to invest in, and the type of loan you need.
To help you get started, here are some key things to consider.
Figure out your finances
This is a fundamental first step. You need to think about your current and future financial situation, including your equity, to make sure you can cover all the costs involved in buying, managing and eventually selling the property. Our budget planner could be a good place to start here.
There are buyer’s costs like stamp duty and legal fees. And once you own the property, you’ll also have to cover ongoing costs like property maintenance, strata costs, council rates and insurance – not to mention any shortfall between the rental income and your mortgage repayments.
The unforeseen costs
It’s important to factor in unexpected costs, too. For example, what if your tenant leaves suddenly and you have to cover the rent for a period of time? Or, what if there’s a sudden interest rate rise and your repayments take a leap?
Do the maths on tax
Unless you’re a maths whiz or an accountant (or both), it can help to engage the experts here. Speak to a financial advisor or accountant about the tax implications of the investment.
They should be able to help you crunch the numbers and explain how negative gearing could work in your favour (or not). They can also talk you through tax deductions for property expenses and interest, and help you confirm your financial position before approaching a lender.
Take your time to find the right property
When researching investment properties, think about your financial goals, not your dream home. It may be better for you to invest in an area you wouldn’t consider living in yourself. Ideally, you could try suburbs that have higher rental yields (that is, the gap between your costs and the rental income) and lower vacancy rates.
When it comes to the property itself, think about ongoing maintenance costs. It may be tempting to buy an older home, but if you have to keep forking out on fixing things, the costs may become too much for your budget to handle.
How to find a lender
On paper, it can be hard to spot the difference between lenders and their loans. But not all loans are created equal. Read our article on 10 questions to ask a lender to see how you can gain a clear picture of potential lenders and find the one that’s right for you.
If ethical investing and clean money’s important to you, then Bank Australia’s home loan range may just have you covered.
Choosing the right investment loan
One of the last big decisions you’ll need to make is to do with the type of investment loan you commit to.
Interest-only loans can be a popular choice for investors – because you’re only paying the interest component of the loan, your mortgage repayments are lower. But there can be pitfalls. First, the principal (that is, the amount you’ve borrowed) doesn’t go down at all – so you’re always accruing interest on the original loan amount. Plus, interest-only can’t last forever – after a set period, you’ll have to start paying the principal, too. There’s also the risk that your property falls in value and you end up owing more on the loan than the property’s worth.
Otherwise, you can choose to make principal and interest repayments, to help bring down the loan amount over time.
It’s a good idea to talk through your options with your accountant or financial advisor before making a decision, as there are pros and cons to both. It’s a matter of what works best for you – today and into the future – so you get the most from your investment.
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