20 tips for financing investment properties

Property management

It’s no secret that Australian real estate prices are high, and because it can be a more affordable way of getting on the property ladder, many homebuyers are buying investment properties rather than looking to be an owner-occupier the first time they purchase a property. An investment property helps to pay the mortgage and with time you can build on a first investment and become a successful property investor.

Financing a first investment property can be tricky, but it can be done. These 20 tips for financing investment properties will help get you on the property ladder and start climbing to the top.

1. Rentvesting

Rentvesting is the new term for investing in rental properties. It can be an ideal way to get into the property market. When you rentvest, a tenant will pay the bulk of the mortgage and you can get your foot in the property market.

2. Finding an investment property loan

Compare investment loans and find lenders who offer loans with reasonable interest rates. In inner cities, that can be a large amount of money, but you don’t need to find property in the inner city.

3. Buying an investment property

The next step is finding an affordable rental property. Look outside the inner city for an affordable investment property. Instead of calling hundreds of real estate agents, look for affordable properties online. Look for areas where properties are reasonably priced, but have a good infrastructure and good transportation links.

4. Using super to buy an investment property

If you have a self managed super fund (SMSF), you may be tempted to use it to buy property. Keep in mind that you will have an investment property for years. If it performs well, using super to buy an investment property may be wise, but not all property investments perform well.

Think carefully before using this option. The Australian Securities and Investment Commission (ASIC) website, Moneysmart, lists restrictions and possible negative consequences of using an SMSF to purchase an investment property. You may be able to buy a property in an affordable area and keep your super fund intact.

5. Compare property advice websites

Don’t settle for the first property advice you get. Compare property advice websites and choose properties in affordable areas where rental returns are high.

A home or an apartment in the inner city might cost more than you can afford, but not have a high rental return. A home or apartment in an outlying area may cost far less and have a good rental return.

6. Factor in other costs

Don’t forget to factor in other costs related to an investment property. Some of these include bank fees, stamp duty, body corporate fees (for apartments), council rates, repairs, maintenance and insurance.

You need to be able to afford all costs related to an investment property.

7. Finding an investment property

It’s not enough to find an affordable area online. After you’ve found an affordable area, visit it and look at properties. A home that needs cosmetic improvements can be a good investment.

If major renovations are needed, a property may not be a good investment. Find out the costs of renovations before buying any property.

8. Maximise your rental return

After you’ve found a property, you want to maximise your rental return. Tenants will pay more for a clean, well maintained property. For some tips, read The best ways to maximise your rental return. You may need to paint the home or apartment and fix anything that needs fixing.

9. Find out about vacancy rates

The last thing you want to do is buy a property in an area that experiences high vacancy rates. Some smaller suburbs have very low vacancy rates because there are fewer rental properties on the market.

If big apartment complexes are going up in a suburb, it may not be the best place to invest because of the increased competition.

10. Self managing an investment property

Property managers cost money, so you might be tempted to self manage an investment property. You need to stay on top of every detail of your investment property.

Are you ready to handle emergency repairs? What will you do when a tenant moves out? Should you manage your own investment property gives the pros and cons of self managing.

11. Hiring a property manager

Why hire a property manager? Your investment property may be some distance from where you live. A good property manager will always be available for you. When your investment property is vacant, they will find a new tenant for you. For some tips on hiring a property manager, read What to look for in a property manager.

Find a good property manager who doesn’t overcharge you. Leasi is a flat fee property management service. Other property managers may charge extra fees for small jobs outside the terms of your contract and these fees can add up fast and may make handling your finances difficult.

A flat fee is more reliable and puts more money in your pocket for your mortgage or maintaining your property. Also remember you can claim property management fees as a deduction on your income tax return.

12. Negative gearing

If the cost of your property investment exceeds the income from the property, negative gearing allows you to reduce your income tax burden. This includes the taxable income from your job or other means of income.

However, you still need to be able to pay for repairs and other costs that arise. Make sure you have enough money on hand for anything that comes up.

13. Tax benefits of an investment property

Keep track of every expense associated with your investment property. These will include larger expenses, but don’t overlook smaller expenses, either.

Even small expenses, such as postage add up over the course of a year. Read about expenses you can claim on the Australian Taxation Office’s (ATO) website for advice.

Read: What can you claim on an investment property at tax time?

14. Stay on top of changes in laws

Budget changes every property investor should know about outlines several recent changes to property investment laws. The good news is that there were no changes to negative gearing laws.

The bad news is that you are no longer able to deduct travel expenses from your income tax. The article points out other changes which apply to property investors.

15. How to build a property portfolio

If you’ve chosen an investment property wisely, you can start to build a property portfolio. Your initial investment may have increased in value, giving you more equity in your investment. You can use this equity to purchase another investment property.

16. Property investment is a business

Treat your property investments as you would a business. It may be a side business if you’re working, but investing in property is a business. Analyse all the options and choose properties that will make money in the longer run.

A good rental return is one factor, but you also want to feel confident your properties will increase in value over time. You may want to sell a property and make use of the money you make on the investment.

17. Do your sums

Your initial property should teach you what you need to know about the expenses of owning property. You will also learn about the tax reductions you can receive. Do your sums and choose a second or third property based on the experience you’ve gained from your initial investment.

18. Look for the next boom suburb

You don’t necessarily want to buy in an area where real estate prices have been growing for years because prices may top out soon. Try to find an area that is set to boom in the future. These may be places outside of a city centre that have been overlooked.

They may have bargain properties, but be set for gentrification, which will increase the value of properties in the area.

19. Infrastructure and property investment

No area that doesn’t have an infrastructure in place will boom in the near term. An area where a shopping centre is being developed may be a great place to invest. Any area should be within easy access to shopping centres, schools and hospitals.

20. Transportation links

No one wants to live in a suburb where transportation links are poor. An example is the Central Coast of New South Wales. Until the freeway linking Sydney to the Central Coast and Newcastle was built in the late 1980s, house prices remained stagnant.

Some investors got in early, after the freeway was announced but before it was built. They found bargain properties before property prices soared.

You will have to do your homework to find affordable rental properties, but it will be worth it. In today’s world of expensive real estate, “rentvesting” in an investment property can be the best move you can make.

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