An investment property is a property you purchase with the intent of gaining a return. It is one which you do not live in but rent out to tenants in return for a rental income or sell for a profit. You cannot purchase an investment property with the intent of living in it as it will become your primary place of residence. As an investor, there are also tax benefits you can claim for your investment property.
To calculate your equity, you will firstly need to arrange a valuation from your bank. This will help to determine how much your property has increased in value. Once you receive the valuation, you will be able to determine how much equity you can access.
Banks will generally allow you to access up to 80% of your home’s equity for investment purposes.
There are many benefits to owning an investment property. Property remains a strong investment choice with a history of stronger investment returns over time as opposed to a fluctuating investment like the stock market. Australian property continues to increase in growth at a rate higher than inflation, giving you a positive return over time. It also provides you with a strong asset base, giving you even more ongoing investment leverage or a nice retirement nest egg.
Lastly, an investment property can yield tax savings at the end of the financial year, especially if your property is negatively geared (where you make a yearly loss to write off against your income). Investing requires complex discussions and we strongly advise discussions with a financial planner prior to any investment decisions or purchases.
As with the purchase of your first home, you will need to provide documentation when applying for an investment loan. You will work your way through the pre-approval stage as per your initial home purchase. If going through the same lender, they will already have access to your repayment schedule and history. If going to a new lender, you will need to provide this information along with:
When purchasing an investment property, you will incur similar costs as when you bought your first home. Fees can include (but are not limited to):
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If you are in the situation where you need to sell your home to purchase a second home, then you can access a bridging loan to cover the funds required. A bridging loan will essentially cover you for the cost of two homes. There is a high amount of risk involved with bridging loans, so it is advised to seek independent financial advice before considering this option.
We have previously discussed the pros and cons of principal and interest and interest only loans. Again, the choice of loan structure is completely up to you and depends on your current financial situation. It is always advisable to choose a principal and interest loan if you can afford to do so. This way, you are reducing the amount of interest you pay over the life of the loan, as well as paying off the actual loan amount.
Investors also choose Interest Only for a set period of time before switching over to a principal and interest loan. This is a handy choice if you are looking to sell the property after the set Interest Only timeframe. The choice is yours and it is important to consider your options and make calculations prior to making your decision.
At Organic Home Loans, we assist clients who are looking to purchase an investment property and secure the right investment loan. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let our home loan experts help you with your investment property purchase and get on your way to planning for your future.
