Buying your first investment property

It can make a lot of sense to buy property as an investment; historically it has provided strong returns. In addition, owning ‘bricks and mortar’ gives investors a sense of having an interest in something real.

But buying property as an investment is different to buying property to live in. Here, we look at some considerations when investing in real estate.

Initial considerations

A great way to buy an investment property is to leverage the existing equity in the home you already own.

You build up equity in your home as you pay off the mortgage you have taken out against the property. Generally, you don’t need to save up a deposit if you use this equity as the collateral you will borrow against to take out an additional loan to purchase an investment property.

Investment property mortgages will usually be attached to your main property. The rent the investment property produces will be used to pay down the mortgage taken out against the investment property.

The idea is to ensure the rent on the investment property can cover most if not all the mortgage repayments, and potentially other costs associated with the property, for instance council rates.

Additionally, it’s possible to build a portfolio of properties over time, repeating this process as you build up the equity in your first, and any subsequent investment properties.

Crunching the numbers

To assist you in crunching the numbers it is important to understand what equity is and how you calculate it. You can think of equity as the difference between the value of the property you own compared to the outstanding mortgage on the property.

Let’s say the property has been valued at $500,000 and you have a $200,000 mortgage on it. This indicates you have $300,000 equity in the property.

Using a simple rule of thumb, if you have $300,000 in equity you may be eligible to borrow up to $1.2 million, including the loan on your current property.

In this instance you would have access up to $1.0 million ($1.2 million less $200,000 mortgage on your current property) for the purchase of an investment property.

However, equity is only one consideration when determining how much you may be eligible to borrow. The other major consideration is whether you have the income to service the loan taking into account your wages, household expenses, investment property income, and expenses and borrowing costs.

Crunching the numbers is where a Smartline mortgage broker can really assist you in understanding your capacity to purchase an investment property.

Other considerations

It’s important to remember you don’t have to buy an investment property near you. There are opportunities to make good returns by investing in property all over Australia, so don’t forget to look outside your own area when deciding where to invest.

Property investing can be rewarding for those who take the time and effort to research the market and choose quality assets with the potential for good returns.

But remember property is generally a long-term investment with high transaction costs – think stamp duty and legal fees – it’s important to take these expenses into account when working out potential returns.

At the moment, there are currently many changes to banking rules and uncertainty about how the rules will be tightened in the future. For instance, in March the Australian Prudential Regulation Authority (APRA) recently announced new rules that limit interest-only lending to 30 per cent of new residential mortgage lending. It also requires banks to limit the number of interest-only loans on properties with a loan-to-value ratio of 80 per cent or more.