What to Consider When Thinking of Property Investment

So, you own your home, are fully settled in, and can comfortably manage the mortgage repayments. It is time to think about growing your investment portfolio.

There are many ways you can do this, including stocks and shares, term deposits, and investing in passive funds like ETFs, active funds, or government and corporate bonds. But property investment is still seen as being one of the safest bets when it comes to ROI.

By purchasing an investment property, you are giving yourself the potential to earn a sizable rental income, enjoy a significant capital return and use tax benefits like negative gearing to your advantage.

While all this sounds appealing, the simple fact is that you cannot buy an investment property without money. So, if you are serious about doing this you are going to have to fund it.

In this article, we will highlight why you should buy an investment property and two ways you can fund it.

Should I Buy an Investment Property?

There are a few things to consider before buying an investment property, and you should only do this if your personal situation enables you to do so.

However, if you can purchase an investment property, you could enjoy three main benefits. These include capital growth, rental yield, and tax benefits.

Capital growth relates to the equity your investment property gains in the subsequent years after you buy it. For instance, if you bought somewhere in 2015 for $450,000 and it was valued at $530,000 today, your capital gain would be $80,000 (before expenses and taxes).

Your rental yield is the amount you earn from your tenanted property minus the expenditure associated with owning it – for instance, mortgage, rates, and utilities. If set up correctly, you can generate a tidy weekly profit/income because the amount your tenants are paying in rent would be higher than the costs you incur.

As well as the potential to generate wealth through capital growth and rental yield, there are also some compelling tax incentives for purchasing an investment property.

For example, you can claim certain expenses associated with owning the second home as tax deductions for depreciation and negative gearing.

The latter is very useful as it enables investors to offset any losses they might incur on their investment against their overall taxable income.

While these are the main benefits, another advantage to this type of investment opportunity is that you can physically see your asset. Unlike other more complicated wealth generation strategies, you do not require specialized knowledge to own and manage a second property.

Funding The Purchase Of Your Investment Property

Purchasing an investment property is always a safe strategy for garnering rental returns and capital gains. However, before you can proceed with a purchase, you will need to have sufficient funding for it.

As it can be hard to save for an additional property whilst concurrently paying off an existing mortgage, most people will need to take out a loan with a bank, or other financial institution.

Thankfully, investment loans tend to be highly leveraged and only require a deposit of between 5% – 10% of the property’s value. Therefore, allowing you to maximize the value of your ROI.

Three main ways investors can save up enough money for a deposit for their investment property are by dipping into their savings, using their superannuation, or borrowing money from family and friends.

Another way to do it is by refinancing.

1. Refinancing your existing home loan

Refinancing is a process whereby some owners can switch from their existing mortgage arrangement to another one that provides much more favorable terms.

This may include lower interest rates, cheaper fees, payment holidays, and more attractive loan terms.

When refinancing, two types of options are available. These are internal and external.

Internal refinancing involves changing to another home loan option offered by your existing provider. With external financing, you switch to a better one provided by a rival provider.

By refinancing your current home loan, you can access any equity it has built up over the years. This equity could then be used as a deposit to buy your investment property.

For instance, if you bought your home in 2015 for $350,000 and its current value is $425,000, the property has built up $75,000 worth of equity. That could be your deposit.

Some people see internal financing as much easier to secure because they are an existing and approved customer of the lending institution.

For those who decide to refinance their investment property, the application process is the same as when you secure your current mortgage, with approval times varying. If you want more information on how long a home loan refinances takes, head over to this guide by Joust.

2. 100 % bank loan

If you cannot save for a deposit but still want to purchase an investment property, there are some circumstances where banks will lend you 100% of the money required.

Typically, these are if you have a guarantor loan for the investment.

With a guarantor loan, your parents or another party can use their property or some other valuable asset as security for the loan.

In this circumstance, you might be able to borrow 105% of the property value and should not need to pay Lender’s Mortgage Insurance (LMI) either.

However, investors should heed caution when electing this method, as it comes with some risks that may place them in a financially vulnerable position. Therefore, we always recommend speaking to a financial professional before committing to a bank loan.

So, there you have it! If you’re considering property investment, be sure to do your research on the market and find the best situation that works for your finances. Happy house hunting!

Additional:

• Small Business Loans 101
• What Are Unlisted Stock Loans?
• What Is A HELOC Loan With Bad Credit Canada?
• Are Single-Family Rentals a Good Investment Strategy?