Now that the election is out of the way, a bit more certainty has returned to the property market. If you’ve been considering investing in property for the first time, here are some tips and hints to help you on your way.
How much can you borrow?
This is the first thing you need to work out, especially if you have a clear idea of the type of property you want to buy and its location. Many websites have calculators that provide you with a rough estimate of how much you can borrow, such as the iMortgage calculator.
Working out how much you can borrow involves adding up all your income as well as working out all your expenses. In addition to items such as food and utilities expenses, also include any loan repayments and your credit card limits.
You also need to factor in the amount of income tax you will be liable for after your taxable income changes due to owning a property.
Loan and purchase costs
Buying a property comes with a range of costs in addition to the actual purchase price. Some of more typical ones include conveyancing fees, loan establishment costs, loan mortgage insurance – payable if you borrow more than 80 per cent of the purchase price - and stamp duty.
The amount of stamp duty payable differs between states so if this cost is going to be the one that decides whether you can afford an investment property or not, you might want to check out properties in states where it is lower.
There are also ongoing costs in additional to your mortgage repayment, which vary month to month. Some of these include landlord and building insurance, body corporate fees, council rates, utilities that your tenants don’t pay for – generally those that aren’t metered – repairs, and any property management fees.
Pay down your debt
Reducing your debt before you apply for a loan is sound financial advice, especially the debt that is not producing an income for you, such as personal loans or your own home loan. The less debt you have, the more you can borrow, and the more you can borrow, the better quality property you can purchase.
Investment loan options
There are hundreds of loan options these days, all with a range of features and benefits. The right loan for you will depend on your individual situation.
Some of the features you might want to consider include the ability to split your loan, interest-only repayments, a line-of-credit facility and whether you can take a repayment break.
By having your loan pre-approved before you go property hunting you will know exactly what you can afford to pay for a property. This will also give you additional confidence and surety when bidding at an auction.
When you discuss with a lender how much you plan to borrow, make sure they take the time to go through all the loan’s features and benefits, as well as the associated costs.
When you invest in property you can either be negatively, positively, or in some cases, neutrally geared. Which option you choose depends on your own cash-flow situation.
Negative gearing is when your expenses exceed the rental income and you incur a loss. These losses can be offset against other assessable income such as your salary and other investment income.
When you are positively geared, your rental income is greater than your expenses. In this situation you will have to pay tax on the income received.
Neutral gearing means the expenses and the income you receive from the property are equal. One of the benefits of being neutrally geared is that when the rent you charge eventually rises, this extra income can be used to pay off the principal of your loan.
Find a suitable property
Before you do this you should first buy a pair of decent walking shoes. You’ll need them when conducting your due diligence, which will involve walking the streets of the area you’re interested in to check out the type of people who live there and the services available.
While you can get this type of information online from various sources, this data can become outdated quickly and nothing beats a walk in the local area to really get a feel for the situation. A classic example is if you see many young families around, then buying a property near a school should be a key consideration.
You should also check out what comparable properties to the one you’re thinking of buying have recently sold for and what the comparable rental income is for similar properties.
And don’t forget that your investment purchase needs to be a head decision – not a heart one. So don’t buy a property that you would like to live in – buy one that people in the area you’re buying in would like to live in.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan