Buying an investment property is a different bag of hedgehogs than buying a property for yourself. When you’re buying your own home it’s (arguably) totally reasonable to debate for hours with your partner about whether the nice garden justifies offering a further $20,000 (only do it if they throw in the giant windmill statue and 6 foot garden gnome). When buying an investment property it’s all business, gnomes don’t come into it. We take you through how to make a smart investment in the property market.
There are two main numbers to look at: rental yield and projected capital growth.
Yield refers to the income you receive from the property. Gross yield is how much rental income you receive, net yield is how much is left after paying any costs. Costs can include mortgage repayments, insurance, rates and maintenance activities. It’s not unusual for the net yield figure to be negative and requiring the owner to top up funds to keep the investment going. Investors choose to do this in order to benefit from capital growth over time.
To find out how to calculate yield for a particular property see our article How do I Calculate Yield?
Keep in mind that banks take a conservative approach when considering yield as part of a mortgage application. For more information check out our article How do Banks Calculate if I Can Afford an Investment Property?
Capital growth refers to how much your property will grow in value. There is no way of knowing this for certain but you can look at the market history, trends and expert’s predictions. Capital growth is usually not a short term payoff, but historically property prices have always gone up over time. Generally speaking, the longer you’ve invested in property the more money you will have made.
Buying a property then doing it up does increase its capital value but take this approach with caution. Of course any work to make the property comfortable to live in should be done, but keep in mind rental properties suffer a lot of wear and tear so any upgrades need to be done with serviceability in mind. You only realise the capital benefit of upgrades at the time of selling. If you keep the property for any length of time it is likely that you will need to do further renovations at the time of selling.
As a landlord you will need to make sure any property you rent out meets the healthy homes standards. If a property you’re considering buying doesn’t yet meet those standards, talk to your mortgage broker. The bank will likely have some concerns as until those standards are met the property isn’t able to earn any income.
The government is in the process of implementing a housing supply bill that allows for intensified building in areas with a housing shortage. Once in place many more properties will become eligible for multiple builds. Check out our blog What is the Housing Supply Bill About for details.
It’s worth looking into new build opportunities. While there are now stricter tax rules for investment properties, there is a tax benefit for new build investment properties; you only have to pay capital gains if you sell within 5 years, rather than the standard 10 years. In addition, you can get a mortgage with just 20% or on occasion as little as 10% deposit. This is substantially less than the 40% deposit required for buying an established property as an investment.
When you’re looking at properties for sale or deciding on a building plan always keep top of mind that this is an investment, not a home for yourself. You want a property that is right for the rental market of the area.
Before you can start looking for an investment property you need to know what your budget is. Talk to a mortgage broker (a Mortgage Lab one of course!) to find out what you can borrow. In the meantime, check out our article Can I Afford an Investment Property?
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