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A Guide to Buying an Investment Property

A Guide to Buying an Investment Property

The latest figures from the ABS show that our love affair with property continues even during the rising interest rate cycle.

The Australian property market is valued at just over $9.6 trillion, down from its record high of $10.4 trillion in March 2022, with property investments remaining a popular wealth strategy for many Australians.

Here's our guide to how you can get started in property investing.

Property Investing: The Pros

Low Barrier to Entry

Property is often considered less risky than other investing/trading methods as it does not require specialised knowledge. However, by not applying specialised analytics, data and industry knowledge, you are undervaluing the true performance of your property portfolio.

Capital growth

Historically, property investors have enjoyed high capital gain returns. For example, if you purchased a property in 2010 for $600,000 and now valued at $900,000, you've made $300,000 in capital gains.

Rental yield

Unlike capital gains which can take years to be realised, rental yield occurs more quickly. Rental yield is the difference between the rent you receive less the costs associated with operating your investment property.

Often it's considered a rental yield between 6 - 11% is a good return. But you should be aware that rental yield can differ nationally. 

Investing in a physical asset

Unlike shares, a motivating factor for many investors is that property is a physical asset. As a result, many investors feel control and confidence in a physical asset they can 'see' instead of investing in the stock market or cryptocurrencies.

Negative gearing and tax deductions

When you rent a property, you can claim tax deductions for many of the expenses you incur.

The most well-known is negative gearing, when deductible expenses are more significant than the rental income.

When you own an investment property for greater than 12 months, you can claim the capital gains tax (CGT) discount, which allows you to reduce your CGT by 50%. However, you should be aware that if the investment property was your home prior and you use it for rental or business purposes for less than 12 months, you can't claim the CGT discount. Working with an Advisor who can guide you through this to ensure you amplify this benefit throughout your entire property portfolio planning.


Property Investing: The Cons

 It's essential to understand that, like all wealth strategies, there are other factors you should consider before investing in property.

Entry and exit costs

Compared to investing in other markets, entering and exiting the property market is more challenging. For example, you must consider entry fees like stamp duty and legal and agent fees.

Property market cycles

The property is a long-term investing strategy, so you will likely see property value fluctuation.

Many investors and homeowners have seen this fluctuation in the last twelve months to April 2023.

Many factors can impact market performance, including CPI, interest rates, property listings and wage growth. In addition, global events such as the GFC and Covid-19 pandemic also affect the Australian property market leading to changes in home values. Working with an Advisor to assist you in modelling these items and factoring in key drivers and historical data that drive the property market will ensure you safeguard yourself against these.

Finding tenants and property management fees

Although a high rental yield is appealing, finding reliable tenants can take time and effort. You can incur additional management costs with tenants, including property management fees or when the property is vacant, and you need to cover the mortgage repayments.


Other factors involved in buying an investment property

House, apartment or unit?

Your first consideration is what you intend to do with the property. It's critical to spend time properly purchasing, considering rental yield and costs associated with owning an investment property.

For example, depending on your strategy, rental yield may be less important when looking to renovate the property and make a profit - you would be more likely concerned about capital growth. 

Owner-occupied or rental properties?

If your goal is capital growth, you might choose to live on the property. Naturally, you will tenant the property if you want rental yield.

When considering which approach is right for you, you should know that capital gains can differ between property purchase as owner-occupied and investment. For example, recent research by CoreLogic found that investors who made profits lower ($223,000) than those for owner-occupied resales ($348,000) in June 2022 quarter.

Avoid costly shortcuts and seek expert guidance.

Seeking expert advice when deciding the right strategy for your personal and financial goals is crucial to the success of your property portfolio. Our team of Property Strategists, Mortgage Advisors and Buyers Agents partner with our clients to provide the expert market insights, due diligence and planning required to help you achieve ultimate success in strategic property investment.

How much can you borrow?

Before searching for your investment property, contact a Mortgage Advisor to see how much you can borrow. They will then calculate how much you can borrow based on several factors such as your dependents, if the purchase property is new or existing, your income and other debts.

You can work out your borrowing power here with our free calculator.

Other property investing costs

Asides from your mortgage repayments, other costs to consider when investing in property:

Stamp duty

Also known as land transfer duty, stamp duty is the cost imposed by the state for the property transfer between owners.

It's a mandatory tax that varies in cost and how it's calculated nationally.

You can read more about stamp duty in our recent article[1]  or use our calculator.

Conveyancing and search fees

When buying a property and transferring ownership, you will engage a conveyancer to help you with the transaction to avoid any costly issues arising in the future. 

Conveyancers usually charge between $700-$2,500, depending on the transaction's complexity. Other costs include disbursement charges for various searches and legal documents such as Certificate of Title search, inspection fees and mortgage registration.

Building and pest inspections

It's highly recommended that you have the property checked by a qualified building inspector. They will look for minor and major defects and construction quality, including structural integrity, pest, and damage.

Other ongoing costs

When purchasing your investment property, other ongoing costs consider. Ongoing costs include property maintenance and upkeep, council rates, utility charges, insurance and body corporate fees (for apartment and unit complexes) and property management fees.

If you’re looking for strategic advice on property investing, or debt structure strategies applied to your home loan contact our expert property advice team or mortgage strategy team today on 1300 001 215.