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Checklist for buying an investment property

Property investment can be a great strategy for growing wealth. But how do you know if you’re in the right financial position to invest in property? Here’s a checklist to help you assess whether you’re ready to buy your first investment property and how to do it.

1. Find out your borrowing power

Before you can even start looking for investment properties, the first thing you need to know is how much you can borrow because this will determine your entire property search. Your borrowing power will depend on a few factors, such as the strength of your loan application and your overall trustworthiness as a borrower. If it’s not your first rodeo and you already own a property, you can use the equity from that property to use as a deposit towards your investment property.

2. Get pre-approval

It’s important to get your finances in order so that you don’t miss out on securing a property. Secure loan pre-approval before you start looking at investment properties - getting pre-approval also means you have a clearer picture of how much you can actually borrow.

3. Research investment strategies

There are a few different investment strategies to familiarise yourself with before getting started. One of the most popular investment strategies in Australia is negative gearing, which is where the costs of owning a rental property exceed the rent returns you earn. This creates a taxable loss which can typically then be offset against your tax liability from your salary and investment income.

You should also consider what your cash flow strategy will be. If your investment is positively geared, it will earn more than it costs to own. This also means the income generated from the investment should be larger than the mortgage repayments and other outgoings. But if the property is negatively geared, outgoings will exceed earnings. However, negatively geared properties offer attractive tax benefits, and you can claim your annual losses against your taxes and wait for the property to grow in value so it generates positive long-term returns.

4. Research the market

As well as researching investment strategies, you also want to research the property market and track how it’s performing. The location of the property will account for 80% of its performance, so it’s important to choose well. Most people are only familiar with a few markets, which are usually located near where they live. But when it comes to investing in property, it’s important to branch out a bit further from your backyard and research interstate investments or other markets within your state that may be further afield.

Websites like CoreLogic and Your Investment Property make it easy to track the performance of a suburb through comprehensive property market data and demographic data.

5. Know your target renters

The kind of property you buy should appeal to your target renters. So if you’d like to attract families, you should look for properties near parks and schools. If you’d prefer your renters to be young professionals, look for properties in inner-city suburbs with bars and restaurants nearby. If you’d like to target the university student market, look at properties located close to universities.

6. Look for a property manager

Not all property investors use property managers, but the right property manager can make a landlord’s life a lot easier by managing the property, organising repairs, showing the property to potential tenants, and collecting the rent. This convenience does come with a fee, but these are tax deductible. Some landlords prefer to manage their own investment properties, particularly if they only have one property to manage, in order to avoid these fees. However, it can be quite time-consuming.

7. Select the right mortgage

Mortgage repayments will usually be the biggest expense for most investors so it’s very important to get the right investment loan. Many investors prefer interest-only loans as the repayments are tax deductible and the repayments are smaller as you’re only paying off the interest portion of the loan, before it reverts back to principal and interest repayments.

If you are ready to get started on your investment journey, call us to chat with a friendly lending specialist or chat with us online or check out our competitive low-interest investment home loans.