Investing in property, if done properly, could turn into the quickest way to ensure financial independence in your retirement or improve your quality of life in the shorter term. Many of us worry that investing sounds great in theory but don’t think it’s something we can do on our own. Don’t sell yourself short – it’s not as difficult as you may think.
The Inovayt team is here to help you with any questions you may have when it comes to building your wealth through property.
What to consider before purchasing an investment property?
As with every big decision you make in life, there are advantages and disadvantages of investing in the property market. To get a better understanding, we’ll look at both in more detail below.
- If your investment property is tenanted, the rental income you receive will make managing the cost of investment easier. If your rental income is higher than your mortgage repayment, you won’t need to contribute any of your own money towards the mortgage and it may even be enough to cover extra costs, such as body corporate fees, agent fees and maintenance costs.
- Purchasing property in a good location – close to public transport, schools, infrastructure, etc – can increase the value of the property in the long run, providing you with a higher return.
- Any tax associated with the expenses paid on the investment property, such as property maintenance, council rates, or fees charged by the managing agent, can be claimed back at the end of the financial year.
- You can use existing equity in the investment loan to purchase another investment with the aim of building your wealth through property.
- Finding the necessary funds to purchase an investment property may be difficult to achieve.
- If you find yourself facing financial hardship and need to sell the property quickly, you may not be able to sell as fast as you’d like, or for the price you’d like, especially if the property isn’t in a great area.
- Just because you’ve purchased a property, it doesn’t mean you will be able to rent it out straight away. Finding the right tenants for your investment may take time, which means you will have to cover the cost of the mortgage repayments and other ongoing costs in the interim.
- You need to keep in mind that if you are offering, for example, a 12-month lease, there is a possibility that the tenants will move out once the lease is up. This means you will be left without a source of income that you may have come to rely on, and you will also have to cover costs associated until you can find new tenants to move in.
- With any investment, there is always a risk of market failure resulting in a crash, meaning there is a possibility you could lose money on the property.
If you’ve thought through all of these things and still want to go ahead, it’s time to get started!
Crunch the numbers
The first step is to assess your financial situation and work out how much you need in savings, or equity in your current home, to buy another property. To work out how much home equity you have, you should estimate your home’s value and then subtract the outstanding mortgage value. The difference is your equity.
You’ll need about 10 per cent of the purchase price, (or 20 per cent if you want to avoid paying Lender’s Mortgage Insurance) and it’s important to leave some room in your budget for government costs such as stamp duty, legal fees, and any improvements you might need to make to the property before it can be rented out.
What if I don’t have enough money saved up, or equity in my home?
There are a few things you can do to boost your savings and get ready to start building your wealth through the property:
- Consolidate your debts
If you have a collection of credit cards and personal loans, it might be time to look at some debt consolidation so you can simplify your repayments and start saving.
Low-interest balance transfers can be a great help, but be careful to pay the debt off before the honeymoon is over because these often come with high ongoing interest rates.
- Make a budget
It might sound a bit old-fashioned but making a budget is a great place to start. Your finance broker will be able to provide you with some budgeting tools and remind you not to forget to include expenses that are only paid occasionally, such as car registration, annual subscriptions, or birthday presents.
Read our blog on budgeting basics here.
How do I increase equity in my home?
Voluntary repayments can help you pay off your loan sooner and build equity in your home.
Depending on your loan, you might have the ability to make extra repayments or pay more than the minimum amount. It’s amazing how quickly you can reduce your loan by taking advantage of voluntary repayments, especially if you have a windfall such as an end-of-year bonus or tax return.
An offset account can also help you reduce your loan by reducing your interest. We often describe an offset account as an everyday bank account that is linked to your home loan. It allows you to transfer your salary and savings into that account, with the balance offsetting the amount owing on your home loan.
When your lender calculates the interest on your loan, they only consider your loan amount minus the funds held in the offset account. This can save you interest over the life of your loan and allow you to pay off your mortgage much sooner. It’s also a great way to increase the equity in your home by making extra repayments and getting your loan down quickly.
I’m ready – let’s do it!
If you think you have enough in savings or equity to buy your first investment property, it’s time to sit down with a mortgage broker to start your property journey.
A finance broker will help you:
- ascertain your borrowing power;
- select from a large panel of lenders to ultimately find the best loan for your needs and objectives; and
- examine different ways to structure your loans for maximum benefit.