7 things to know before you buy an investment property
While any sort of investment carries risk, planning for the future and considering all its implications can facilitate successful investment.
Relatively stable with potential for growth, property is the preferred investment asset for borrowers in Australia.
Here are the things to consider before investing in property.
1. What is investment property?
An investment property is real estate purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both.
Investment properties can be a great way of creating additional income. They can be either short term or long term investments depending on the return you wish to make.
2. What is rental yield?
It’s important to understand rental yield so that you can calculate what your profit and losses might be when investing to rent. Rental yield is essentially the amount of money you make on an investment property by measuring the gap between your overall costs and the income you receive from renting out your property:
Sum up the total annual rent that you receive from your tenant
Divide your annual rent by the value of the property
Multiply that figure by 100 to get the percentage or gross rental yield
For example,
If you receive $400 a week in rental income. Then over the course of the year, you’ll receive $$20,800.
If your property is worth $450,000. Then your gross rental yield is equal to $20,800 ÷ $450,000 X 100 = 6.2%.
Your net yield is calculated after all expenses have been deducted from your rental income.
3. Should I invest in a unit or a house?
Well it depends…
Are you looking for regular long term income or are you looking for a quick flip, like renovating and reselling for a higher value?
Are you looking to build up a property portfolio over time or are you looking to move into the property in the future?
A house generally offers higher capital growth - due to the land component - but there’s also far greater potential for negative gearing which needs to be factored into your financing requirements.
Units are far more likely to offer higher rental yields and their lower price point will enable investors to get into the market earlier and to build up a property portfolio more quickly.
There are caveats though in terms of the exact property you choose and its location. If you’d like to have a chat about how Sandcastle Finance can help you consider your options, contact us here. https://www.sandcastlefinance.com.au/contact-us
4. What’s the difference between owner-occupied and investment property?
Owner-occupied means you or your family intend on living in the property. On the other hand, an investment property is one you do not live in, but either rent out or resell.
5. What loans are available for investment properties?
Investment loans generally incur slightly higher interest rates than owner-occupied home loans.
Investment home loans often have stricter eligibility requirements
You can find out more about the difference between these loans here.
6. What investment interest rate can I get?
Most lenders offer different ways to pay interest and repay the loan. You can either pay a “fixed-rate” where your interest rate is fixed for an initial period (usually 5 years). You can also have the traditional “variable rates” where the interest rate offered varies with market rates.
Consider which method of repayment best suits your current and expected future circumstances before investing in property.
Why not have a chat with us to make sure your lifestyle needs are taken into consideration and we can help you compare rates as well. Get in touch here.
7. What are the tax implications of owning an investment property?
Be aware of the tax implications of owning investment property. You will be required to record all tax-deductible expenses and declare any rental income in your tax returns.
According to the Australian Taxation Office (ATO), your maintenance, interest and other expenses from owning an investment property can be claimed as tax-deductible. Investing in a property is a massive milestone in anyone’s life. It’s important to understand exactly how investments work in order to optimise your return.
Property investment can be tricky, but after conducting proper due diligence and analysing the possible scenarios - both good and bad - you should feel more confident.
Book a free 30min consultation call today to understand how Sandcastle Finance can help you improve your chances when investing!