12 Golden Rules for Buying Your First Investment Property

By Nell Matzen  |  27 May, 2021

Purchasing an investment property can be a daunting task arguably even more so than buying your first home. There are multiple factors to consider and numbers to crunch before pulling the trigger.

Luckily, we’ve put together a list of the 12 golden rules for buying your first investment property, so you can navigate the property investment market armed with everything you need to know.

1. Have you set a budget within your means?

When budgeting for your investment, remember that the costs go far beyond covering the repayments

Upfront costs

  • Deposit (generally around 10% to 20% of the purchase price) unless you’re paying outright
  • Loan application fee (a one-off payment to your lender covering basic admin)
  • Lender’s mortgage insurance (which you may need if your deposit is less than 20%)
  • Government charges (stamp duty, mortgage registration and transfer fees)
  • Legal and conveyancing costs (which will vary depending on the solicitor or conveyancer)
  • Building, pest and strata inspection fees.
  • Vacancy costs if the property is left vacant for a while

Ongoing costs

  • Loan repayments and interest charges
  • Strata fees (for communal properties)
  • Council rates, water rates and insurance (for the building, contents and you as a landlord)
  • Repairs and maintenance costs
  • Property management fees
  • Other charges, such as land tax

2. Review your credit history

Before beginning the application for any loan, a quick and easy credit score check is an essential step. Sneaky debt or late payments could potentially affect how much you can borrow or if you are approved at all. 

Unfortunately, having a loan application rejected can further diminish your credit score, so it’s important to understand your rating and its effects on your borrowing power before applying.

3. Decide on a suburb

The suburb in which you choose to buy a property can make or break your investment. The wrong suburb will have you struggling to find renters and missing out on vital rental income; the right suburb will allow you to have your pick of renters who will supply rental income from day dot.

Research your desired properties on real estate sites to ensure you are getting market value, determine average rental returns and vacancy rates, and check to see if there are any upcoming developments nearby that could impact prices.

Remember to pick suburbs with good amenities, close to public transport, schools and shopping centres, to ensure you’ll see price growth in the years to come.

4. Decide what you want to purchase a house or unit?

What you buy can impact your capital gains as much as where you buy. Whether you choose a house or a unit, it ultimately comes down to which will be the easiest to rent and still have growth potential.

Houses are harder to rent but offer more capital growth. On the other hand, units are easier to fill due to their affordability and proximity to amenities. When deciding between the two, determine your investment goals and budget and whether you prefer higher long-term growth over steady rental income.

Houses and units also vary in maintenance and ownership costs. Houses are generally more expensive to maintain, but units often come with costly quarterly strata. Although, purchasing a house will also leave you saddled with council rates and land tax. 

5. Decide who will manage the property?

Self-managing your investment property may seem like an easy way to save money, but there are multiple obligations involved:

  • Advertising the property
  • Screening potential tenants
  • Property inspections
  • Managing payments
  • Maintenance and repairs
  • Chasing up late rent and dealing with evictions

If you would prefer to leave it up to the professionals, you can expect to pay an estimated 7%-10% of the rental income in management fees.

Make sure you do your research and compare agents to get a quality service at a reasonable rate.

6. Pick the right type of mortgage for your situation

Choosing the mortgage for your investment property is a vital part of the process and could lead to some substantial savings. Whether you choose a fix-rated, variable rate, interest-only or principal and interest loan will depend entirely on your financial situation and goals.

For an investment property, structuring your loan is a critical component to maximise your taxation benefits. It’s advisable to speak to a Mortgage Expert to put you on the right path. 

7. Understand your legal obligations

Becoming a landlord is a big responsibility that involves several legal obligations before, during and after a tenancy, which will depend on your state or territory.

To ensure you are prepared to take on this legal undertaking, please check the Fair Trading website where your property is based. 

8. Can you use the equity from another property?

Using equity from another property as a deposit for your investment property is an excellent way to avoid handing over a 10-20% deposit.

Having equity in a property is not a guarantee you can use it to purchase an investment property. Banks will look into multiple factors: age, income, dependents and additional debts to decide if you are eligible.

It’s advisable not to use all of your available equity to purchase your investment property, allowing yourself a buffer for any additional costs you might incur. 

9. Check the age and condition of the property and facilities

An investment property is the largest investment you’re likely to make, so it’s vital to ensure it’s a sound one. Carrying out building and pest inspections by licensed professionals will help prevent any nasty, major repairs down the road. Of course, a property doesn’t have to be in flawless condition, as small renovations are a great way to add value to your property. 

10. Have you investigated potential tax deductions?

A variety of the costs involved in owning an investment property can be claimed as a tax deduction. Of course, interest payments are the most attractive deduction, but there are many more potential deductible costs, including:

  • Property management fees
  • Other borrowing fees
  • Council rates, land tax and strata fees
  • Building depreciation and the loss of value over time in fittings and fixtures like ovens, dishwashers, carpets and hot water systems
  • Repairs, maintenance, pest control, cleaning and gardening
  • Building and landlord insurance
  • Phone costs and stationery
  • Accounting and bookkeeping fees.
  • Advertising costs

11. Are you across other tax implications?

There are a number of tax implications associated with investment properties that could potentially provide considerable savings or spendings. 

Whether your loan is negatively or positively geared will determine how much you are taxed on your investment earnings.
For a property to be negatively geared, the interest and other fees must be more than the property’s income overall. If your investment property income amounts to more than the interest and associated fees, then your property is positively geared. 

A negatively geared property can reduce the amount of tax paid on your yearly salary, where a positively geared property will mean paying tax on the net income your property makes, on top of your annual salary.

Although it might not be relevant for some time, you will need to pay capital gains tax on the profit you make when you sell your property.

If you sell your house within one year of purchase, you will only need to pay capital gains on 50% of your profit instead of the usual 100%. 

12. Make the property attractive to renters

Be a good investor and a good landlord by making your property attractive to renters. Give your tenants a blank space to make their own by sticking to a neutral colour palate.

Think about whether you would want to live in the property and if the amenities and condition are up to your standards, after all, someone will be making a home in your property. 

Ultimately, by keeping your property in good condition, you will likely attract better quality applicants who will take care of your investment. 

Interested in purchasing an investment property? Talk to us about your refinancing options and how you could unlock potential your home equity.

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