Why buy an investment property?
Australians are among the most active property investors in the world, with an average of one in every three new mortgages each month arranged for people to buy an investment property. Most of these investors are ordinary people with ordinary jobs earning ordinary incomes. So, why is property investment so popular?
Capital growth is the increase in value of property over time and the long term average return for Australian residential property is about 9% a year. Importantly, because property markets move in cycles, property values go through periods of stagnation as well as decline. This is why taking an investment view of at least 10 years is important. Note: if your investment property increases by 7.5% a year, over a 10 year period it will double in value.
Rental income, also known as yield, is the rent an investment property generates. You can calculate this by dividing the annual rent by the price paid for the property and multiplying it by 100 to produce a percentage figure. As a general rule, more expensive properties generate lower yields than more moderately priced properties. There is also usually a direct, inverse relationship between capital growth and rental income. Those properties producing a lower rental yield will often deliver greater capital growth over the long term.
The Federal Government allows you to offset against your taxable income any losses you incur from owning an investment property. For example, if the amount you receive in rent from tenants is $5,000 less than the cost of servicing the mortgage, and paying rates, water and other fees associated with the property, at the end of the year you can add that $5,000 to the amount of income on which you don’t have to pay tax. If you work as an employee, with income tax automatically deducted from your pay, this means you’ll receive a refund from the Australian Taxation Office (ATO) after the end of the financial year.
Property values generally fluctuate less than the stock market. Many investors say they experience greater peace of mind for this reason.
Property enables far greater leverage than many other investments. For example, if you have $100,000 in savings, you could invest it in a portfolio of shares, or use it to buy a property worth $500,000 by taking out a mortgage for $400,000. If shares go up by 10% during the year, your share portfolio would be worth $110,000 and you would have gained $10,000. If property goes up by 10% during that same year, your property would be worth $550,000 and you would have gained $50,000.
You don’t need a big salary to invest. If you are buying to invest, lenders will take rental income as well as your own income into their assessment. If you already own your own home and have some equity in it, you may be able to use this as a deposit, meaning that you can buy an investment property without having to find any additional cash. If you don’t own your own home and feel you may never be able to afford one, buying an investment property may be a good stepping stone to one day being able to afford your own home.
Frequently Asked Questions
What’s the difference between an investment loan and an ordinary home loan?
Most of the same types of home loans and loan features apply for investors as for owner occupiers. Some lenders may charge higher rates for investment properties if the associated risks are higher.
Can I use equity in my home as a deposit for an investment property?
Many an investor has started out by utilsing the equity of their own home. Banks will usually accept equity in a home (or other property) as additional collateral against which they are prepared to lend. This means you could potentially borrow the full purchase price of the property, as well as all costs (stamp duty and other fees) without having to contribute any cash. The risk in using your home as collateral is that if you can’t fund the mortgage for the investment property, the investment property and your home are at risk. Contact Davies Home Loans to discuss your options.
What is negative gearing?
This is when the cost of owning a property is higher than the income it produces. If the rent you get for an investment property is less than the interest repayments, strata fees, maintenance and other costs, your investment is negatively geared, or making a loss. This loss can be offset against your income, reducing your income tax bill.
How much money can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you could borrow with our fast and clever loan options tool. Or contact us, so we can help with calculations based on your circumstances.
How do I choose the loan that’s best for me?
Our guides to loan types and features will help you learn about the main options available. There are hundreds of different home loans available, so this is best left to discuss with us face to face.
How much do I need for a deposit?
Usually between 5% – 10% of the value of a property, which you pay when signing a Contract of Sale. Speak to us to discuss your best options for a deposit. You may be able to use the equity in your existing home or an investment property.
What fees/costs should I budget for?
There are a number of fees involved when buying a property. To avoid any surprises, the list below sets out all of the usual costs:
Stamp Duty – This is the big one. All other costs are relatively small by comparison. Stamp duty rates vary between state and territory governments and also depend on the value of the property you buy. You may also have to pay stamp duty on the mortgage itself. To find out your total Stamp Duty charge, visit our Stamp Duty Calculator.
Legal/conveyancing fees – Generally around $1,000 – $1500, these fees cover all the legal rigour around your property purchase, including title searches.
Building inspection – This should be carried out by a qualified expert, such as a structural engineer, before you purchase the property. Your Contract of Sale should be subject to the building inspection, so if there are any structural problems you have the option to withdraw from the purchase without any significant financial penalties. A building inspection and report can cost up to $1,000, depending on the size of the property. Your conveyancer will usually arrange this inspection, and you will usually pay for it as part of their total invoice at settlement (in addition to the conveyancing fees).
Pest inspection – Also to be carried out before purchase to ensure the property is free of problems, such as white ants. Your Contract of Sale should be subject to the pest inspection, so if any unwanted crawlies are found you may have the option to withdraw from the purchase without any significant financial penalties. Allow up to $500 depending on the size of the property. Your real estate agent or conveyancer may arrange this inspection, and you will usually pay for it as part of their total invoice at settlement (in addition to the conveyancing fees).
Lender costs – Most lenders charge establishment fees to help cover the costs of their own valuation as well as administration fees. We can let you know what your lender charges but allow about $600 to $800.
Moving costs – Don’t forget to factor in the cost of a removalist if you plan on using one.
Mortgage Insurance costs – If you borrow more than 80% of the purchase price of the property, you’ll also need to pay Lender Mortgage Insurance. You may also choose to take out Mortgage Protection Insurance. If you buy a strata title, regular strata fees are payable.
Ongoing costs – You will need to include council and water rates along with regular loan repayments. It is important to also take out building insurance and contents insurance. Your lender will probably require a minimum sum insured for the building to cover the loan, but make sure you actually take out enough building insurance to cover what it would cost if you had to rebuild. Likewise, make sure you have enough contents cover should you need to replace everything if the worst happens. We can provide both home building and contents insurance.
Landlord’s insurance provides standard building and contents cover plus cover for theft or malicious damage to the property by tenants and covers loss of rent in certain circumstances. It also covers the owner’s liability (e.g. if a tradesperson is injured while working in the property). Landlord’s insurance is an affordable extra safeguard and strongly recommended for all investors. We also provide competitive Landlords Insurance.