Things to consider when investing in property:
Unfortunately, many Australians will not have enough money in their super to retire comfortably and many may need to rely on their pension and government support when the time comes. Property has been a proven way to enhance your chances of securing retirement freedom if you take the steps now in preparation for your impending retirement.
Buying your first investment property
- Who and where are you buying – buy from a trusted developer or builder who has a history of delivery and choose a location that will suit tenant demand (transport, schools, amenity, lifestyle and employment)
- Are you financially prepared – do not overstretch. You should consider it as a medium to longer term type of investment, so you’ll want to make sure that you can afford to maintain your mortgage repayments over the long term
- Do you have the knowledge and/or find an expert to do it for you
Apartments or houses?
Positive and negative gearing
Negative gearing: occurs when you spend more on your investment property than you receive from it. There is an opportunity in some cases to offset the loss as a tax deduction on other forms of income
Positive gearing: occurs when the income you receive from your investment property is more than it costs you to have it
Financing your investment
Traditionally investors like interest-only loans but we have experienced a substantial increase on interest-only loans. A principal and interest loan will help you build your equity in the property more quickly.
First time investors
- Your deposit – generally you will be required to show 12% of the property value and show evidence of funds to pay for your stamp duty, government and legal fees
- Your maximum loan will be 90% of the total value of the property, inclusive of LMI (lenders mortgage insurance)
Using equity from your existing home
1. Check the equity on your existing home
2. Equity is considered up to 80% of your property value, as a loan to value ratio exceeding 80% will incur lenders mortgage insurance. For eg, if your property is valued at $500,000 while the outstanding loan is $300,000, you would have $100,000 in equity
3. In order to accurately assess the equity, it is recommended that you request a lender valuation. Most major lenders provide such a service without any fee or cost
Using the equity or drawing the equity as cash?
Once the equity amount is identified, you could either:
- Draw it as cash readiness for another new property, using it as a deposit OR
- Use it as part of security for your investment purchase