Should I buy an investment property?

Buying an investment property may potentially help you take steps towards financial security. But unlike buying your dream home where the focus is to find a property to live in and enjoy every day, an investment property purchase is all about potentially finding one that will deliver a good financial return.

There are 2 main types of investment property returns:

• Yield, which is annual rental income versus costs. This can also be referred to as net profit from owning the property.
• Capital growth, which is how much the property increases in value over time.

Whether you’re buying an investment property for yield, capital growth, or both, you can set yourself up for greater success by answering 5 important questions listed below.

Do you have an investment strategy?

An ‘investment strategy’ is not one size fits all and will change based on your needs. Within the property market, investments can range from passive to active, risky to safe, new build to fixer upper. Tailor yours for your specific needs.

For the most part, property can be seen as a ‘set it and forget it’ type of investment, but setting clear goals will also better help define your investment focus. To guide your investment, consider what you see as the key financial milestones in your life. When will they occur? How could an investment property help you achieve these goals? Use these milestones to guide your needs.

How long do you want to own an investment property?

There are many ways to approach a property investment – whether you’re looking for short- or long-term goals, these are central to your strategy and provide the foundation for your investment plan.

Some example property strategies are:

Short term – Are you looking to buy and renovate a home then sell it quickly? This is also known as flipping properties. Be mindful of tax implications for such activities.

Long term – Are you hoping to build a portfolio of properties to provide passive income when you retire in 20 years’ time? Or perhaps you’re wanting to build a nest egg for your children's school fees in eight years?

What’s more important for you - capital gains, rental yield or both?

A capital gain is simply the profit from the sale of an investment property (after debts such as home loans are paid off). If you have a capital gain, you might need to pay Capital Gains Tax (CGT). Rental yield is similarly simple, being the total profit made from the rent of an investment property after considering costs.

So - which one is more important to you, or do you want both? This is important because determining will help you decide the type of property to purchase. For example, an apartment purchase in the CBD may mean more rental returns but potentially lower capital gains. Whilst buying in an up-and-coming estate in the suburbs, or regional areas may mean lower rental returns to begin with, but longer term may be worth more when sold.

How much can you borrow?

Once you’ve set out your investment property goals and formed your strategy, you’re now in a better position to start thinking about applying for funding or an investment property loan. Simple, online tools such as BankVic's calculators are a great place to understand your borrowing capacity.

Some factors to consider are your repayment ability and deposit. At BankVic you may be able to start from just as little as 10% deposit of the investment property purchase price, note that you might have to pay LMI (Lenders Mortgage Insurance). If you have an owner-occupied home, you might be able to use that to secure your investment property purchase therefore additional deposit might not be required.

Other costs might also be incurred, such as stamp duty and legal fees, so please talk to our experienced BankVic home loan specialists who can assist you with your next steps.

What is your budget?

The final step is to work out what you can afford, you can easily do this by talking to our home loan specialists who can help you determine the answer.

If you’d prefer to work it out yourself, start by listing your anticipated rental income in one column (you can find this by researching the area and asking the realtor for historic records). Next, identify your expenses in another column. List every expense you can think of including:

• Rental management fees (typically a percentage of earnings)
• Home, contents and landlord insurances (yearly)
• Council rates (typically quarterly or yearly)
• Water bills
• Possible body corporate fees
• Average maintenance costs (your local real estate agent should be able to advise on an average annual allocation).

This is the real stress test and provides a clear indication of how much it’s likely to cost you per week, per month or per year to own an investment property. What you can borrow and what you can genuinely afford in repayments may not always align, but once you’ve created your income versus costs analysis, you will have created the last piece of the financial preparation puzzle.

Contact BankVic to chat about home loans.

Information in this article is general in nature and does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you before acquiring a product or service. Property investments involve financial risks and tax implications and you should consider your investment decisions carefully and if uncertain seek personal financial advice.

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