Buying a property to rent out is a popular form of investment. Houses and units are easier to understand than many other types of investments, yet they do have some issues you need to be aware of. Before you enter the property market, check if this type of long-term investment suits you.
Where and what you buy will affect your return on investment. The following tips will help you develop your own criteria for a good property investment.
Where to buy
Think twice about investing in property markets you are not familiar with.
Look for areas where high growth is expected, in other words where there is potential for capital gains. Property experts regularly provide tips on up and coming suburbs, just make sure you are aware of any biases they may have.
Look for areas where rental income is high compared to the property value.
Research recent sale prices to give you an idea of what you can expect to pay for property in the same area.
Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area. This may make it harder to rent the property and may make it difficult to sell in the future.
Research proposed changes in the suburb that may affect future prices. Things like planned developments or zoning changes can affect the future value of a property. Don't assume that last year's boom will continue this year.
What to buy
Look for properties with features that will appeal to as many people as possible, such as a second bathroom, lock up garage or somewhere close to shops, schools and transport.
Look for a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees.
Low maintenance costs are important.
Units can be easier to maintain than houses, although you will have to pay body corporate fees.
Property can be less volatile than shares or other investments.
You can earn rental income and benefit from capital growth (if your property increases in value over time).
If you take out a loan to purchase an investment property, interest on the loan and most property expenses can be offset against rental income for tax purposes.
You are investing in something you can see and touch.
Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs.
An increase in interest rates will increase your repayments and decrease your disposable income.
There may be periods of time where you don't have a tenant and will have to cover all costs yourself.
You can't sell off a bedroom if you need to access some cash in a hurry.
If property investment is your major investment you may have little or no diversification.
If the value of the property goes down you could end up owing more than the property is worth. This is known as negative equity.
There are very high entry and exit costs such as stamp duty, legal fees and real estate agent's fees.
Most people will borrow to invest in property. This is called 'gearing'. The more you borrow, the more you will pay in interest
Negative gearing is when your income from an investment is less than your expenses. In the case of property this means the rental income you receive is less than the interest and other expenses you pay. Your investment is making a loss which most investors hope they will make up with a capital gain when the value of the property increases.
A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. See the Australian Taxation Office's section on residential rental properties for details of income you must declare and expenses you can claim.
Remember, you are only reducing your tax payable because the income from your investment isn't covering your expenses.
Positive gearing is where your income from an investment is higher than your interest and/or other expenses. This means you will have extra money in your budget but you will have to pay tax on the additional net income.
Positive vs negative gearing
Many investors focus on the tax benefits of negative gearing without considering the loss in after tax income.
Parents providing assistance with the deposit must be aware that a gift is not repayable. The majority of banks will require parents to declare that the funds they have provided are a non-refundable gift.
This declaration is done via a statutory declaration.
Before approving your home loan, any lender will need to be confident you can pay it off. So they have a checklist of criteria you must satisfy.
Below is a discussion of the more common requirements. Of course, the requirements vary from lender to lender, so it’s impossible for us to cover everything here; this information is a guide, not a prescription.
Most lenders require a deposit of some sort before they’ll give you a loan. So, naturally, if you have savings you can put towards a deposit, you’ll find it easier to get a home loan.
But many lenders need more than just a deposit. They also need to know you’re capable of making regular home loan repayments. The best way to prove this is to start putting a regular amount of money aside each month, before you apply for a home loan. This will dramatically improve your chances of approval.
Most lenders require you to have been in your current job for a minimum of 3-6 months. It will also help your home loan application if you have worked in the same industry for a number of years. Generally speaking, the more steady and reliable your income, the more likely your loan will be approved.
If you’re self-employed
If you’re self-employed, most lenders will need to see two years’ worth of your personal and business tax returns before they’ll consider offering you a home loan. All lenders will want to see your ABN registration and sometime your GST registration but not all lenders. We have a number of low doc loans available for self-employed applicants, which require less in the way of business financials.
All banks will require 100 points of ID to be supplied for verification.
3 months current loan statements of all debts.
Two current payslips and current group certificate / tax returns.
Evaluate your needs
Mortgage Broker will work with you to get a detailed picture of what you need from a home loan.
Calculate borrowing power
Your mortgage broker will calculate how much you can borrow so that you know the price range you can afford
Compare your options
Your broker will compare and contrast hundreds of home loan products from up to 25 lenders, including the big four banks.
Has Great Knowledge
The banks are competing hard for your business. Your broker will provide expert product knowldge to help you choose the home loan deal that's right for you.
Do all the legwork
Your broker will do all the paperwork and follow through the entire process with the lender from start to finish, making it as hassle-free as possible for you.
Your broker may even be able to get you pre-approval on your home loan so that you can make an offer on a property or bid at auction with confidence.
All at no cost to you!
Your broker will do all of this at no charge to you because the lenders pay us a commission when the mortgage is settled. This doesn't affect the deal you get from the lender.
The only thing that matters to us is the home loan that's right for you. So we pay your broker the same rate no matter which home loan you choose from our wide choice of lenders.
There are many reasons why it pays to use a mortgage broker when shopping for your home loan, and even if you want to use your own bank for your mortgage, you can still use a broker to help process paperwork and manage the application on your behalf, plus there is no direct cost to you.
The biggest advantage of a broker over a bank is choice. When you sit in front of a broker you are sitting in front of dozens of lenders and hundreds of products, versus visiting a banker who has access to only one bank’s products. This is especially important at time like now, when the banks are saying ‘no’ more, and by having more choices you’re likely to get a ‘yes’.
Brokers often own their own businesses and are committed to their clients for the long term, with many years of industry experience and knowledge of all the different banks procedures and products. Banks are big companies; they move their staff around and reward good performers with promotions away from their customers.”
If you’re looking for specialised assistance with your loan, it pays to talk to a specialised broker. “For example if you’re starting property investing, look for a broker who specialises in property investing as the can set the right structure in place so you can get the max leverage from your properties
4. Follow Up
Following up the progress of your loan application is time consuming and frustrating. A good mortgage broker will have a system for chasing you up, keeping you informed and saving you time.
5. Personal Banker
Your mortgage broker is “like the perfect personal banker,” They know what needs to be done, they make sure it happens and because it’s their own business, they’re in for the long haul. Bank staff change often so even when you find a good personal banker they change jobs before you know it.”
When you engage an experienced, professional mortgage broker, you get a whole lot more choice. Tick Finance gives you access to up to 25 lenders — all established and reputable.
A quality mortgage broker will do all the legwork on your behalf. This includes liaising with lenders, conveyancers, settlement agencies, real estate agents, builders — the lot. At Tick Finance we specialise in this area.
The right fit
Plus, you don’t have to make the decision alone. You benefit from professional guidance, so the mortgage you end up with is exactly the mortgage you need.
The importance of informed decision-making can’t be underestimated. There are hundreds of mortgage options out there, but what one is best suited to your particular situation and preferences? Every lender seems to use different terminology and product features, and of course every home loan is accompanied by reams of terms and conditions. So between the sheer variety of options and the overwhelming fine print, even making an ‘apples-for-apples’ comparison of lenders is a daunting task, let alone making an actual decision!
A good mortgage broker will carefully assess your situation, then call upon years of knowledge and contacts to identify exactly the right mortgage for you.
Less chance of refusal
If you’ve been refused a mortgage by one lender, you won’t necessarily be refused by everyone. But knowing what lenders are more lenient and what lenders are very strict, and in which areas, requires more than just a comparison of their websites. All lenders have different credit policies and overarching restrictions on who they’ll lend to. By engaging a broker with specialist knowledge of lender policies, you significantly reduce the risk of being refused a home loan.
A quality mortgage broker will do all the legwork on your behalf. This includes liaising with lenders, conveyancers, settlement agencies, real estate agents, builders — the lot.
Tick Finance brokers work with lenders and home loans every day of the week. Assuming you choose a quality mortgage broker, like the ones at Tick Finance, the entire process will go smoothly.
Long-term peace of mind
When you find a great mortgage broker, like the ones we have at Tick Finance, stick with them. We’ll look after you for the life of your loan, and make sure you’re always in the best possible position financially. Tick Finance brokers will proactively stay in contact with you, periodically checking that you have the right mortgage from the right lender.
What is a dual income property?
Dual occupancy homes are a relatively new concept to the Western Australian building industry. To realise the benefits, you need to understand the cost savings and returns on rental yield. A dual occupancy residence offers a second livable area under the main roof. The additional cost to create the second livable area is vastly cheaper than creating a second standalone home.
How it works
A 4 bedroom 2 bathroom single occupancy home built within a green fields estate (“4x2 family home”) typically generates rent of around $460 to $480 per week. A dual occupancy home that could be built right next door on a green title lot can achieve $430 pw on one side and $300pw on the other offering a total combined rent of $730pw. $480pw v $730pw.
This is a question we are often asked.
The answer: As soon as you think “Hmmm, I think I might buy a house.”
Whether it’s your first home, your next home or an investment property, as soon as the idea pops into your head then give us a call. We can help you with your goals, no matter whether they’re short or long term.
Buying a home can be quite a daunting experience, even if you’ve done it before.
At Tick Finance we assist you to clarify your objectives and take the steps towards making them a reality – but on your terms and your timeframe. You are always in control.
We explain the price range you can afford and support you with research while you look for your property.
Once you’ve found somewhere we find a suitable loan and guide you through all the paperwork.
And we don’t charge for this service!
So if you’d like us to help you, call, email or visit our website today.
Ph: 08 9200 1841