How to buy an investment property

Step 1: Review your finances

Before diving deep into property research, start by taking a close look at your finances.

Assess borrowing power

Calculate how much you can borrow as well as the amount you’ll be comfortable putting down as a deposit.

Calculate equity

If you already own a home and have paid off a large portion of the loan, or your home’s value has increased, you can choose to borrow against the equity in that home for your investment property purchase.

Plan for costs

• Lenders will typically require a 20 per cent deposit if you want to avoid Lenders Mortgage Insurance (LMI).
• Budget for upfront costs like stamp duty, legal fees and any expenses such as initial repairs and renovations the property may need.

Choose loan type

Think about the type of home loan that would best suit your investment strategy. Fixed or variable, principal and interest or interest-only home loans have their advantages and considerations depending on your financial goals.

Get a pre-approval

Get a pre-approval sorted before you start searching for properties. This will give you clarity with your budget and also show sellers that you’re a serious buyer.

Step 2: Define your investment goals

Identify your focus

Have a clear idea of your goals to help guide your property search and financing decisions. Here are some ideas to help you get started

• Positive cash flow: Seek areas with low vacancy rates and high rental demand to generate rental income that covers all your expenses and provides a profit.
• Capital growth: Target properties with long-term value appreciation.
• Tax benefits: Consider deductions on interest, repairs and depreciation to lower your tax bill.

Step 3: Research and find the right property investment

With your finances in order, it’s time to research and find an investment property that meets your goals.

New build vs. established property

Ask yourself: Do I want an established property or a new build?

• Established properties offer rental income, but it could involve more maintenance. 
• New builds on the other hand may have lower upkeep costs and offer tax incentives but tend to be in newer areas where rental returns may be lower.

Location, location, location

When you’re looking to buy an investment property, a key factor is location.

• A property close to amenities like schools, shopping centres, public transport is attractive to renters and is likely to improve the home’s value over time. 
• Investigate the rental yield and vacancy rates in the area to understand your potential income and how easy or difficult it can be to find tenants. A low vacancy rate area may offer more stability for rental income. 
• For long term appreciation, prioritise areas with high growth potential, even if rental income seems low initially. 
• Factor in employment opportunities, projected population growth, infrastructure plans, public and private sector investments.

Assess ongoing costs

Every choice has its costs and considerations, so be sure to choose what best suits your lifestyle and investment plan.

• Consider ongoing costs like insurance (building and landlord insurance) and council rates, as these can vary depending on the property’s location and impact profitability.
• It’s also worth checking if the property is already tenanted. Tenanted properties will provide rental income.
• If it’s a vacant property, you’ll need to factor in both time and cost to market the property and find reliable tenants.

Step 4: Conduct property inspections

Arrange a professional property inspection to help uncover any hidden issues.

Pre-purchase inspections

• For private sales make offers subject to a building and pest inspection, as it can protect you from repairs and costly fixes, also giving you room to negotiate or back out if serious issues emerge.
• For auctions, conduct inspections before bidding as your offer will be unconditional.

Step 5: Decide on property management

Once your offer has been accepted, it’s worth considering if you want to manage the property yourself or hire a property manager.

• Self-management: You’ll save fees but the process will need more involvement and time on your part to manage tenant inquiries, repairs, inspections and rent collection. 
• Hire a property manager: Hiring a property manager, on the other hand, offers a more hands-off approach.

Step 6: Finalise settlement

The settlement process for your investment property is the same as when you’re buying a home to live in. The only difference is instead of collecting the keys, your property manager takes over your lease agreement with the current tenant or helps with finding a new tenant.

Step 7: Prepare for tax liabilities

When it comes time to sell your investment property, you’ll need to consider capital gains tax (CGT). CGT is applied to the profit that you make from selling the property. This is calculated as the difference between the sale price and the purchase price, after factoring in allowable expenses like home improvements, conveyancing fees, etc. CGT has the ability to impact your overall profit, so it’s important to factor it into your overarching investment strategy.