Property investment is still one of the best ways to build a solid retirement plan. If you have never dabbled in real estate, a beginner’s guide on how to buy an investment property will help you get started.
Many Australians love to secure their futures and build wealth via smart property investment. Some investors buy a property and rent it out while others buy, renovate and resell it.
Whichever option you choose, having the right information will ensure you make the right decision and avoid getting scammed.
Let’s explore ten tips on how to buy an investment property in this article.
Further Reading: While this article provides a comprehensive overview, if you’re specifically interested in Brisbane’s top investment suburbs for this year, our guide on Best Suburbs to Invest in Brisbane 2023 is a must-read!
- 2022 Guide: Investment Property Tax Reductions
- Investment Property Tax Tips: What You Can and Can’t Claim
- Beginner Investor Guide: Building Your Property Portfolio
Beginner’s guide: How to buy an investment property
These ten tips will help you buy an investment property.
1. Consider your budget
Property investment is usually about looking for properties that will increase value over time. This means you must buy the property at the right price to get a reasonable profit.
Real estate prices fluctuate a lot and can be difficult to decipher. The key is to take your time with the process and do in-depth research into properties in the area you are interested in.
You can also get an idea of what the properties in your chosen area are going for from lenders and mortgage insurers and adjust your budget accordingly. These professionals also know valuable property developments in different locations that you can explore.
2. Choose the right property
You must determine if you want a home unit or bare land. Even though bare lands don’t bring in rental income, they can help you turn over a profit quickly, especially if you buy one in a prime area with limited supply.
If you are not cut out to be a landlord, you can hire a property manager, buy a unit to flip, or opt for land instead. Are you looking to invest in a beach house, which, although very likely to appreciate, will mean higher upfront costs? Choose whichever works best for you and your budget.
3. Consider ongoing costs
For instance, if you are buying a rental property, you have to consider ongoing costs that may stem from necessary repairs, upgrades, investment property tax deductions, etc.
Using an investment property calculator can give you an idea of how much you may be spending initially and moving forward.
4. Know your investment goals
Have a clear idea of what you want to achieve with your investment property, and be realistic about these goals.
When the industry is booming, it makes sense to buy a property, flip it and sell it at a higher price. On the other hand, when the industry isn’t doing so well, you may not get the same return on a flip, and it might make more sense to buy and hold.
5. Pick the right mortgage for you
You must get sound advice from professionals concerning the best mortgage option for you since there are so many available options.
Ask your potential lenders the right questions like:
- How much can I borrow for an investment property?
- What is the interest rate on the property?
- Should I choose a fixed or variable rate loan?
- Is the interest on my property tax deductible?
These questions and others will give you a clear idea of the best mortgage for you. Be careful not to choose a lender blindly, but only after extensive research.
6. Buy in a budding area
If you are buying a rental investment property, try to choose an area with a lot of demand. For example, buying a property close to a school, malls, transport, etc., will make it very attractive to potential renters.
If you are buying land to hold for years, ensure the area you choose has growth potential. The main giveaway is whether there are proposed developments in the area.
7. Leverage your existing equity
You can use the equity you have in your home to purchase an investment property. Equity is simply the amount of money you have paid towards your mortgage.
For example, if your home costs $800,000 and you have paid $600,000, with $200,000 left, your equity is $600,000. You can use this equity to finance your new investment property and even borrow more.
8. Be aware of negative gearing
When thinking about how to buy an investment property, you need to be aware of negative gearing. Negative gearing is a sigh of relief for many people who want to purchase investment properties in Australia.
Your rental property will be negatively geared if the rent you receive on the unit cannot fully cover your loan repayments.
Negative gearing on a property has certain tax advantages as you can deduct your maintenance and borrowing costs from your income.
However, this is only possible if you have another taxable source of income. Despite its tax advantage, negative bearing does cause financial strain, so you must be fully aware of your budget before buying a property.
9. Use a building inspector
You cannot think of how to buy an investment property without engaging the services of a building inspector. Don’t look at how much these professionals cost, but focus on how much they could be saving you.
It doesn’t make sense to buy a property and spend the first month replacing the plumbing and roofing. Some repairs are vital; however, some are just absurd.
A building inspector will give you an idea of how old the property is, its full condition and facilities, and an estimate of how much you may be spending on repairs.
10. Get a property manager
Not everyone is cut out to deal with renters every month. Getting an experienced and professional property manager can take some of the load off your shoulders.
He can also give you valuable advice and insight on managing your renters and when your rent needs to be reviewed. The property manager will also educate you on property law, landlord and tenant rights and even help you source for good tenants.
A good property manager will also give you ideas on how to buy an investment property if you want to purchase more.
The good news is that you don’t have to pay a property manager out of pocket. Their fee is usually taken out of the rent and is fully tax-deductible. So, you have nothing to lose from hiring a house manager but everything to gain.
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