How to buy an investment property

Review your finances

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

• Calculate your borrowing power as well as the amount you’ll be comfortable putting down as a deposit.
• 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.
• Lenders will typically require a 20 per cent deposit if you want to avoid Lenders Mortgage Insurance (LMI).
• Alongside the deposit, also factor in upfront costs like stamp duty, legal fees and any expenses such as initial repairs and renovations the property may need.

Next, think about the type of home loan that would best suit this investment strategy. Fixed or variable, principal and interest or interest-only home loans have their advantages and considerations depending on your financial goals. Once you’ve figured the type of loan that works best, it can be a smart move to 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.

Think about your investment goals

Having a clear idea of your goals will guide your property search and financing decisions. For instance, are you looking for positive cash flow (rental income that covers all your expenses and provides a profit), capital growth or tax benefits? 

• Areas with low vacancy rates and high rental demand are often favoured for positive cash flow. 
• Tax benefits on your property investment can be yet another goal with benefits like deductions on mortgage interest, repairs and depreciation, leading to a lower tax bill and improving the financial return on your investment.
• Alternatively, you may be the type of investor who wants to focus on capital growth, which is banking on the property’s value increasing over time.

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.

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

With established properties, you have the ability to get immediate rental income, but it could involve more maintenance. New builds on the other hand have lower upkeep costs and offer tax incentives but can be in newer areas where rental returns may be lower.

Location is key

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. You can also research 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. 

When it comes to long-term appreciation, you may 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, when researching location.

Other considerations

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

Property inspections and managing your investment

If you’re keen to make an offer in a private sale, consider making it 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. Arrange a professional property inspection to help uncover any hidden issues. If the property is being sold in an auction, your offer will be unconditional, which means you’ll have to tackle the building and best inspection prior to the auction. 

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 can save you fees but will need more involvement and time on your part to manage tenant inquiries, repair, inspections and rent collection. Hiring a property manager, on the other hand, offers a more hands-off approach.

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.

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.