Property investment is a bold step to securing your financial future. But, as with any other purchase, buying property comes with an element of risk. So, to avoid creating too many unknown variables you cannot control, let’s look at how you can travel the safest path with our top property investment tips.
Using Home Equity
Many property investors use the equity stored in their main residence/home to buy property investments. Over time, this makes building a property portfolio easier because they are maximising their cash flow and not physically having to come up with a deposit. Instead, their home equity becomes lender security that backs the investment loan and reduces lender risk.
But, before you rush-in and use your home equity for property investment, it’s important to understand how equity works. Plus, it’s vital to not over-extend yourself. Otherwise, you’ll increase your financial risk and leave yourself vulnerable.
Whats home equity?
Simply put, your home equity is the proportion or value of the property that you own. Calculating equity is as simple as estimating the current market value of a property less any outstanding home loan debt. For instance, let’s say your home value is $860,000 on today’s market. You bought the home 15-years ago for $240,000. Over this time, you’ve paid $160,000 off the mortgage. So, you owe $80,000. Therefore, you have $780,000 in home equity less the 20% needed to secure your $80,000 mortgage debt. Thus, you have $764,000 in equity, or enough to secure 10 x $300,000 investment property home loans, which is equivalent to a 20% deposit of $60,000 for each property.
Whats the right strategy when using home equity?
- Always give yourself a financial buffer of at least $15,000.
- Have 6 to 12-months of mortgage repayments set aside.
- Cover your home and investment costs always.
- Reduce risk by increasing cash flow.
- Know what you can afford and stay below this limit.
- Calculate interest costs at 2% higher than current rates.
How much equity should I use?
- Access no more than 60% of your home equity as security.
- Use the least amount of equity as possible.
- Own more of your property than you owe.
Hire a Quantity Surveyor
When buying an investment property, all fittings and fixtures in the property are depreciable. These items include carpets, lights, and the hot water service, as well as tiles, the dishwasher and any other item that sells with the property. Depending on the age of these items, and their predicted lifespan, they can reduce your tax.
Whats the right strategy when hiring a quality surveyor?
- Hire a licensed quantity surveyor.
- Ask for a quote for an investment property depreciation schedule.
- Set aside Costs range from $600 to $1400 per schedule.
- Have a schedule completed before renting the property.
How does a quantity surveyor help?
- The Australian Taxation Office recognise a quantity surveyor.
- Surveyors estimate construction and replacement costs.
- Deductions average between $5,000 to $15,000+ per property in the first year.
- No matter the age of the property, they find deductions.
- Your accountant uses your depreciation schedule to reduce your tax.
Negative gearing means you contribute more financially annually to the property costs than the income received. Having a positive cash flow, however, occurs when you make more money from the property than it costs.
Whats the right strategy when it comes to gearing?
- If you want to reduce tax, then negative gear.
- Those looking to increase income should create a positive cash flow.
- Always work out property costs before buying.
If I don’t understand gearing what can I do?
- Ask your accountant.
- Contact your mortgage broker.
- Discuss options with your financial planner.
- Research gearing on the net.
- Read as much as possible about gearing and property investment.
- Join a property investment group or forum.
Researching the Market
Before you start investing in property, understand the basics. Know what you’re doing and why; don’t leave anything to chance. This approach means conducting independent research using reputable resources and taking the time to educate yourself.
Whats the right strategy when researching the market?
- Know what type of property you’re seeking to buy.
- Set yourself a realistic budget.
- Stick to your budget.
- Make a list of affordable locations.
- Seek out sought after locations.
- Think like a tenant when buying.
- Consider supply and demand.
- Always look at amenities and transport.
- Have a contingency plan in place to support your financial decisions.
How do I conduct research?
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To buy right, you need to think long-term and stick to an investment strategy. There are also many options for the type of property that you can buy including units, apartments, houses, duplexes as well as semi-detached or attached property.
Whats the right strategy for buying the right investment property?
- Consider your investment goals.
- Know your borrowing power.
- Have a set budget.
- Aim to maximise cash flow.
- Always think about risk and how you can reduce this.
Where do I start?
- Research the market.
- Visit opens and auctions.
- Give yourself an investment goal – self-funded retirement etc.
- Know how you’ll achieve your goal – buy a property once every 18-months.
- Set yourself deadlines to achieve goals.
- Define your property types and locations.
- Discuss your options with a mortgage broker.
Are you wanting to buy an investment property and searching for property investment tips? Then contact eChoice, we can help you achieve your investment goals faster. Plus, our brokers have access to 100s of products, so well find the right loans for you.