How to avoid property pitfalls
When investing in property the stakes can be high. To avoid going from bad to disastrous, it’s always a good idea to make decisions with a certain degree of caution. But it’s n
Research and having the right people to help you are important when investing in property.
It pays to do your homework on the property market before you dive in. Property in some locations in Australia can be considered to be a sound investment due to steady and consistent increases over time. But don’t count on it being a quick win. Property usually has a seven-to-ten-year cycle, with highs, lows, and steady stints in between.
We’re here to help find the right lender for your circumstances no matter what the current property investment environment is like. We can also wade through the many investment loan options on offer, leaving you more time to find the ideal property.
House prices often increase in bigger strides than units, offering more potential for capital gain over time. But a rental home also comes with added responsibilities, including gardens and lawns (and sometimes a pool) to maintain.
A unit or townhouse may not increase in value as quickly, but they are generally easier to maintain and may even be easier to rent for that very reason, depending on location, condition, and size.
You’ve obviously heard this before. But location can mean different things when it comes to rental properties. Renters are often looking for maximum convenience so consider properties near schools, major shopping centres and public transport.
Spend plenty of time researching target areas, including recent property price movements, rental vacancy rates and any proposed infrastructure improvements. You should also do some scouting as if you were a renter to get a first-hand look at the local market.
One of the worst mistakes you can make with any investment is to buy with your heart instead of your head. Remember, your rental property is not your ‘home sweet home’.
A well-presented property is desirable, but think sensible, not swank.
Ideally, you’ll want a neutral interior colour scheme, serviceable and resilient flooring and window coverings, a low-maintenance yard and good storage. And if buying an older style unit, look for one with an internal laundry, a garage or car space and few stairs (unless there’s a great view to be had higher up, which can add to the property value).
An investment property requires regular financial commitment beyond the loan repayments. Make sure you have the capacity to cover land and water rates and any maintenance and repair costs. Tenants are entitled to repairs or replacements as quickly as possible under their rental agreement, so you will need to have the means to pay.
Apartments or units also come with body corporate fees, which can run to thousands in some modern complexes with professional landscaping and shared amenities, such as swimming pools.
Make sure you take out landlord’s insurance. That covers you for damage caused by a tenant and unpaid rent if a tenant skips out, in addition to other standard risks, such as a house fire or a storm.
If you invest in a strata title property, make sure the body corporate has sufficient building insurance to cover the cost of rebuilding the complex at today’s prices. It’s often hard to work out what you need to cover versus what the body corporate covers. A good rule of thumb is everything from the wall paint inward is yours and everything outside that is often covered by the body corporate.
Many property investors take advantage of interest-only loans because interest payments are tax-deductible. That means you’re taking a punt that the property’s value will increase over time, leaving you with a financial gain in the long run.
This may be a good strategy for high income earners who are taking advantage of negative gearing. If you choose to positive gear your investment (i.e. generate a profit from the rental income after costs), you might want to consider a principal and interest loan and use the profit to shave off the principal.
Just remember, you will pay tax on any income from your investment. Talk to your accountant about your tax situation so your broker can help you find a loan that’s right for you.
Managing a property takes time and energy. If you don’t have much to spare of either, you should get a professional property manager to advertise the rental, screen and select tenants, collect and pay the rent, co-ordinate repairs and maintenance, provide condition reports and manage any disputes. Ask other local landlords for referrals for reputable managers.
You should also conduct twice-yearly inspections yourself.
If you decide to self-manage, you will need to be well-versed on tenancy laws and prepare to organise repairs, including those that arise after hours.
The ATO will give you a discount off your tax bill for wear and tear on property. It’s known as depreciation, and can be a very handy windfall for investors, especially if you buy a new property.
The formula is quite complex and depends on the age of your property, building materials and the various fittings. That’s where a professional quantity surveyor comes in. For a fee, they’ll assess the property and complete a Tax Depreciation Schedule, which your accountant will incorporate in your tax return.
If you need both incomes to be considered in the lending equation, speak with us to get the right advice on the best ownership equation for your circumstances.
These tools make it easy to calculate how much you can borrow based on your income and expenses, estimate your home loan repayments, and work out how to repay your loan faster.
These tools make it easy to calculate how much you can borrow based on your income and expenses, estimate your home loan repayments, and work out how to repay your loan faster.
Need to know more about buying an investment property? Check out our property investor FAQs.
Australians are among the most active property investors in the world, with an average of one in every three new mortgages each month arranged for investors. Many of these investors are ordinary people with ordinary jobs earning ordinary incomes. So, why is property investment so popular?
Capital growth. Capital growth is the increase in value of property over time and the long term average growth rate for Australian residential property. Importantly, because property markets move in cycles, property values go through periods of stagnation as well as decline. This is why taking an investment view of at least 10 years is important.
Rental income. Rental income, also known as yield, is the rent an investment property generates. To calculate net yield, you need to deduct all the expenses (ongoing costs + cost of vacancy) from the annual rental income. You then divide that number by the property’s purchase price and multiply by 100. This will give the percentage yield.
As a general rule, more expensive properties may generate lower yields than more moderately priced properties. There may also be a direct, inverse relationship between capital growth and rental income. Those properties producing a lower rental yield may deliver greater capital growth over the long term.
Tax benefits. You may be able to offset against your taxable income any losses you incur from owning an investment property.
You don’t need a big salary to invest. If you are buying to invest, lenders will take rental income as well as your own income into their assessment. If you already own your own home and have some equity in it, you may be able to use this as a deposit, meaning that you may be able to buy an investment property without having to find any additional cash. If you don’t own your own home and feel you may never be able to afford one, buying an investment property may be a good stepping stone to one day being able to afford your own home.
We’re all unique when it comes to our finances and borrowing needs. Our borrowing power calculator is a great place to start to work out how much you can borrow. Check it out and then get in touch with an AFG broker so we can help with calculations based on your circumstances.
Our guides to loan types and features will help you learn about the main options available.
Usually between 5% – 10% of the value of a property, which you pay when signing a Contract of Sale. Speak with us to discuss your options for a deposit. You may be able to borrow against the equity in your existing home or an investment property.
Go to our Repayment Calculator to give you an idea of what your repayments might be. Because there so many different loan products, some with lower introductory rates, talk to us today about the deals currently available.
Most lenders offer flexible repayment options to suit your pay cycle. Consider asking for weekly or fortnightly repayments, instead of monthly, as you would make more payments in a year, which will shave dollars and time off your loan.
There are a number of fees involved when buying a property. To avoid any surprises, the list below sets out all of the usual costs:
We offer our loans exclusively through experienced AFG brokers via our broker network, making sure you receive a loan that meets your individual needs.
AFG Home Loans Pty Ltd is part of the ASX listed Australian Finance Group Ltd (AFG), one of Australia’s leading mortgage broking firms for almost a quarter of a century.
The information provided is a short summary and is not everything you need to know to select a product and features that are appropriate for your needs and requirements. All information is subject to change without notice. Terms and conditions and lending criteria may apply. Fees and charges may be varied or introduced in the future.
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