Beginner’s Guide to an Investment Property

By Lauren Leisk, Yahoo7 Moneyhound Updated December 17, 2012, 9:00 am

When it comes to investment property, first-home buyers can learn from property experts as they attempt to secure their own foothold in the real estate market.

Take the uncertainty out of the investment property market and start to narrow down your search with a few basic steps while being aware of the most common choices you will have to make.

Deciding where to buy

Take the emotion out of shopping for investment property by not looking for the house in which you would like to live – unless you plan to move in later.

However, it is important that your property remains tenanted 99 per cent of the time, so look for people magnets such as transport and amenities as well as buying in an area where there are plans to improve infrastructure.

Related: Head or heart - question your emotions on property decisions

How to get into the investment market

Comparing loans for investment property shows many lenders will lend up to 90 per cent of the value of the property. So a $350,000 investment property will need a $35,500 deposit. On top of this, you will need to pay costs including loan application, valuation and stamp duty, so set aside another 5 per cent of the purchase price – an additional $17,500. In all, a $34,500 deposit will allow you to purchase a $350,000 property.

To get into a savings habit and a plan of action to save this amount of cash a high interest savings account can help. With up to 4.6% p.a. interest on savings paid to you monthly, cumulative interest can help you reach savings goals faster, and the best part is most of them a free to open and own. One of the highest rates around at the moment is from Westpac at 4.67% p.a.

Making investment loans easier

If you have already jumped through hoops to get your first home, you may find it easier to go down an investment property path. You may be eligible to borrow more because rent is taken into consideration. You might also have equity in your own home to act as deposit.

Related: What is a home equity loan?

Mortgage insurance and how to avoid it

Mortgage insurance is a premium you must pay to ensure your lender isn’t left short should your home be sold down the track for less than you paid. If saving for the deposit was easy, why not save some extra and make a 20 per cent deposit. You will avoid paying mortgage insurance and already have some equity in your property.

Improvements: Know what they cost

It’s always handy to know your property could be improved with some DIY handiwork, but you also need to know what that will cost. Figure out a square-metre rate before you even get started. Remember to factor in the reality that while renovations are underway, there won’t be any income from tenants. Can you manage that or is buying a more low-maintenance house from the outset going to be better?

Related: Rennovation loans for home improvements

DIY rental: Forgo the property agent

A rental agent may take the first few weeks rent from a prospect they introduce then charge a premium each month. The DIY path can be done when it comes to tenants and there are Australian Residential Tenancy and Commercial Lease Agreement templates available to use with rental property in Australia.

However the process doesn’t end there. Be prepared to deal with dispute resolutions, other legals, rent collection, advertising, tenant screening, inspections and appraisals.

Introducing negative gearing

The buzzword from the baby boomer generation, negative gearing property is when the cost of borrowing to invest exceeds the income you will produce from the venture. Reducing your tax with negative gearing in Australia has allowed many investors to accumulate property portfolios that grow in value over time.

Interest-only loan vs. interest plus principal

You may be able to put off paying down your loan and choose an interest-only period to get you started. You can use loan repayment calculators to see how much difference this makes. If you have an interest rate of around 7 per cent, switching a $350,000 loan to interest only will free up $100 a week.

Related: The several stages of buying a home - a step by step guide

How long should you hold investment property?

Costs incurred in property transactions and stamp duty generally mean investment properties should be kept for as long as possible. Every time you change a property, you may also lose lump sums in capital gains tax.

This is another reason why location, infrastructure and future development is so important.

Investment property may sound like a daunting venture, but familiarising yourself with some of the likely encounters could see you approaching investment loan applications with more vision.

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