Buying Your First Property For Investment?
In today’s world, and especially Australia, real estate is often seen as a very stable investment that is going to appreciate with time. Barring massive disastrous acts of God or a big adjustment in the property market, real estate is often a great investment.
One issue you will face is the barriers to entry – It’s not exactly cheap nor easy to get in. Are you considering buying your first property for investment? Then you should double check what you’ve done, and what you should do before you complete the process.
ACCOUNTING AND TAX
Take note that in Australia, there are a multitude of costs associated with buying, owning and selling a property, that warrants a whole article by itself. For example, when you buy a property, there’s stamp duty, legal costs, conveyancing fees, pest and building reports, and more.
In terms of owning a property, things to consider include council rates, water rates, insurance, land tax, property management fees, and more. Don’t forget that when you earn from your property, the Australian government gets its own share through taxation, so don’t forget to take that into account and use a reputable Accountant to assist with managing your affairs tax wise.
HOW FAR CAN YOU STRETCH YOUR INVESTMENT?
Just because real estate can be a good and viable investment doesn’t mean that you should sink in your entire life savings, and then take loans to purchase a property. It’s important to understand that although you’re holding onto a valuable asset, if you can’t find a tenant, then you may struggle to keep up with the mortgage payments. In general, the advice is, don’t put your eggs all in one basket, and don’t assume your investment has a minimum 100% return. As a general rule, banks allow for 80% of the gross annual rent for servicing the loan. It is always a good idea to have a buffer in place, without relying on any rent from tenants to supplement that. 3 months minimum cover is usually a good starting point as a safety net.
WHICH BANKS ARE THE BEST?
The bank that gives you the best rates is not always the best bank. Honestly, rates change rather frequently, and banks often change their promotions as the consumer market changes. Before taking out a mortgage, do your research. Don’t just look at the rate and be done with it – Check the fine print. Your situation is going to be different to everyone else. You need to have a conversation about what you are trying to achieve – and then set up the loan in an appropriate manner. These conversations with a professional Mortgage Adviser are critical to future pathways into more property and / or your changing life.
TO SPLIT, OR NOT TO SPLIT?
You may have thought about splitting your loan and using a line of credit facility. While it is definitely a viable path for some people, stop to consider if it’s appropriate for you. The advantages are clear – You’ve got money at your fingertips, if and when you need it. It’s nice to have that buffer. This can help to tide you across a rough period if you ever experience one.
However, the risks are proportionate to the rewards. Some lines of credit can be terminated early by the lender, in a process termed “calling it in”. Essentially, you are asked to return the full loan amount immediately with interest, without delay. If you’re in a particularly bad spot and have relied on this line of credit to a large extent, this can result in difficult refinancing or restructuring.
If you are also the type to be tempted by having access to funds that have been approved but not yet drawn down (like a big overdraft or credit card limit) – then a Line Of Credit is definitely not for you. A Mortgage Professional can work with you to set up the most appropriate structure to achieve your purchase whilst protecting you from eating into the equity you have built up unnecessarily.
Then there is fixed versus variable and how much to split on each. This is a topic that requires more depth and we will cover this in another blog soon.
In short – setting up the loan with a good mixture of flexibility and protection is the key.
KEEP YOUR EYES PEELED
In summary, the real estate property market in Australia offers a very real, viable and profitable route of investment. However it is important to note, things change, regulations and industries change, and nothing really is set in stone. Make some key contacts in and around the area you are looking to buy in. Talk with agents, small business owners and get a feel for the area. Visit the area in different times of the day. You may have not noticed something at the open home, as agents rarely will open a home on a busy road at a busy time of the day.
If you choose to invest, the keywords are prudence and meticulousness. By being prudent and not investing beyond your means, and being meticulous to double and triple check all fine print for all legal and monetary issues, you’ll be able to invest safely and happily. To see what property investments there are, contact us for a consultation.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
