Investors Guide

There are several ways to think about how to buy an investment property; you need to choose a strategy that suits your individual circumstances:

Positive Cash Flow Strategy (rental strategy)

Positive cash flow, or being positively geared, is when the rental income from your investment property covers the interest of your loan and other expenses, like insurance and maintenance. This strategy means you can use your income to lower your loan and increase equity.

Negative Gearing

This is when you borrow money to pay for an investment property. It means that the property's annual expenses are larger than the rental income. The idea is that you take a short-term loss assuming that property values will rise, then eventually sell for a profit.

Investment Partnerships

Co-investment partnerships, or joint venture partnerships, are when you bring others in on the investment. This is a popular option during times when property values are increasing. It makes investing affordable to a larger group of people, like families or even friends.

When investing in property, there are many ways to finance. Every lender has specific requirements to determine whether you are eligible for a loan. Ultimately, they want to see that you will not fail to meet loan repayments. They ideally want to see a healthy pool of savings, low to no debt and the ability to keep up with any outgoing living expenses like rent and bills. They will also consider your income. This includes your salary; any property rent; government benefits you may receive and dividends.

Here are some ways you can finance your investment property.

Equity

Equity is the difference between your existing properties market value and the balance owing on your home loan. It is used by the lender as a security deposit on the finances for your investment property. You might choose to use equity to save on using cash.

Savings 

You can choose to use your savings (or put them towards) a deposit. The amount you need will vary between lenders, but it’s usually about 10%. You may also need to factor in lenders' mortgage insurance. Other costs to consider include legal fees and stamp duty.

Inheritance and Gifted Deposits 

If you have received money from inheritance or a cash gift deposit, then you can use this to invest in a property. Regardless of how much you have, lenders will still want to see that you can manage repayments by assessing your income, savings and expenses.

Trusts

Trusts, particularly family discretionary trusts, are a popular option for those investing in property. It means a group of people from the trust, or family members, have an interest in the property. If you use this option, a trustee is assigned to manage your assets and the beneficiaries receive any income earned by the trust. You’ll need to budget for setting up the trust in addition to maintenance costs. Also note that losses made by the trust cannot normally be passed on to the beneficiaries. This may be an issue if you plan to negatively gear the property.

Determine your budget and decide on a rough pricing bracket for what you can afford to borrow. Many people choose to take on the services of a mortgage broker. They’ll compare hundreds of loans and find a product that best suits your unique circumstances.

There are things you can do to bolster your borrowing capacity when investing in property. Make sure you have a healthy credit check, reduce any credit card limits, and consolidate loans.

Once you've determined a budget, you can narrow down your location boundaries. Choosing the right area is also dependent on the kind of tenant you are looking for. Whether you’d like young professionals or families, ask yourself what they would be looking for in a property and area, rather than what you would look for personally.

Here are a few things to consider when deciding on a location.

High Demand

Buying in the same area you live in might be convenient, but not always the best decision. Buy where there is high demand and low rental vacancy rates. Ideally you should choose an area with limited rental supply to ensure a pool of prospective tenants. 

Capital-to-regional migration has seen a 7.9% rise, the third highest level in the last 5 years. This puts Huntlee in the spotlight as a place of opportunity for the savvy investor, with people stepping away from the urban demands of Sydney and choosing a more relaxed rural lifestyle, while still having easy access to city life.

High Growth

If there are plans for development, it will add value to your property and be an attractive proposition for potential tenants. Evaluations of the property market over the last 10 years have shown that growth in regional areas far outweighs metro areas. Sustained economic growth in the Hunter Valley is predicted to rise by nearly 75% by 2036.

Infrastructure

Assess whether the area has a wide range of public amenities including schools, shops, and leisure facilities. The Hunter Valley has proven to have booming infrastructure, with an abundance of shops, restaurants, schools, childcare and leisure facilities. Future plans look bright with many exciting new major projects on the way.

Accessibility

Note the access to public transport, major freeways and travel to nearby cities or places of interest. The Hunter Valley is close to Sydney and Newcastle and a short drive to neighbouring towns. It has easy access to the freeway, with plenty of public transport options.

Employment

Find out about employment opportunities in the area, is there a dominating industry?

The Hunter Valley region provides employment opportunities for industries including tourism, defence, mining, advanced manufacturing, agribusiness and a government start-up sector. 

There are currently well over 300,000 jobs, and with planned infrastructure in the pipeline that number is predicted to rise 19% by 2036. The Hunter Valley region has been identified by the Government as a prospective hydrogen hub**. The hydrogen hub could benefit from the existing energy and related industries and infrastructure in the area. Although still in the early stages, this could generate many jobs for locals of the region.

Whether you are buying an existing property or planning to buy land to build on, there are associated risks. To minimise these risks, here are some factors to consider when looking for a property that holds value as an investment:

The Value of Land

If you are looking to build, make sure you have strong land content.

Structural Resilience

A newly built property is more likely to appreciate in value compared to an older property because modern builds are built to last. Due to increases building standards over the years, many older homes will not meet the current standards of design and structural integrity.

Amenities

To attract the best rental income, an investment property must be designed and equipped for the modern tenant. Whether that is a professional couple or young family, there are certain elements of a contemporary home that every tenant is likely to need to make their living space comfortable. This includes quality appliances, ample storage space, air conditioning and a layout that works for the lifestyle.

Energy Efficiency

Many new homes are designed and built with energy efficiency as a priority. This not only helps you preserve the environment you live in, but could save you financially. Older properties are more likely to need extra help to make them more efficient, like integrating draught excluders or replacing electrical items with more energy efficient alternatives. This can lead to unnecessary costs and ongoing maintenance.

Maintenance

A low maintenance property is an attractive proposition for some tenants. They want no-fuss, easy living without the disruption of ongoing maintenance issues. New homes are sustainable therefore more likely to be low maintenance, because everything is newer and built to current standards.

Add-ons

Find out what your new investment property comes with. Newer homes often include a builder warranty or the opportunity to upgrade.

Tax Benefits

If you invest in a new property you might be eligible for tax benefits, including a 2.5% tax deduction from the property’s value every year for up to 40 years. If you are purchasing off plan, you may also receive significant stamp duty concessions.

Other benefits include the potential to deduct some of the expenses associated with maintaining your investment property from your taxable income. And if you are a first home owner, you may be eligible for the first home owner grant. Extra tax benefits are also available from buying appliances for the property such as air conditioners and dishwashers.

Investing in a property may appear daunting. It’s easy to get lost or overwhelmed with the amount of information you need to know and understand.

Enlisting a property manager takes away some of that stress and pressure. They’ll provide professional insight and guidance regarding compliance, as well as handling the day-to-day tasks of property management.

Investing in property is a great way to secure a passive income, and finance your future. Do it right and you’ll reap the rewards.