4 Key Considerations When Buying an Investment Property
When preparing to buy an investment property, most people spend a lot of time researching the property market to make sure they find a property that will give them the most return on their investment. Investors who puts some effort into finding a loan that matches their investment strategy will be paving the way for an even better return on the investment. When researching loans, it’s important to consider:
- your investment goals
- the types of loans available for long term investment
- the types of loans suitable for short term investment, and
- the effect of negative gearing
Your investment goal will determine the type of property you choose to invest in, and the type of loan you use to fund your investment. While there can be many reasons for investing in property, it can be helpful to consider what your timescale is for achieving your goal. While property investment is most usually a long-term plan such as ensuring an independent retirement, many investment properties are bought with a shorter timescale in mind, like accruing funds for a specific purpose or to use as a deposit in another property purchase.
Investment property loans for long term investments are readily available. If your investment goal has a long timescale, you’ll be intending to keep your investment property for 20 years or more, so most of the standard home loan products could suit your purposes. When comparing loans, remember that loans that costs you least in interest over the term of the loan could be the best for you, but you’ll need to balance this against other financial issues. For example, the shorter the loan term the less interest you pay, but lower monthly repayments on a longer term loan might be more manageable for you. The rate of interest is always a relevant consideration, and again each loan has to be compared in the light of its benefits to you: if you are likely to have spare funds that you could put towards paying off the balance of the loan you might prefer to take a variable interest rate loan that allows for extra payments, but if you aren’t likely to make use of flexible loan features you would be better off with a standard variable interest rate or fixed interest rate loan with limited features. The fact that your tenants will in effect be paying the loan off for you is important, but any saving on the overall cost of the loan will benefit you in the end.
Investment property loans for short term projects are different from loans where the lender is intending to keep the property for some time. The most appropriate loan for this investment strategy is one that caters for the loan being repaid quickly. For example, if you’re intending to sell the property within about five years you should be wary of taking a fixed interest rate loan with a hefty exit fee that will reduce the profit you make from the sale of the property. An “interest only” loan may appeal to you: for a fixed term only interest is paid, so monthly repayments are lower than for a principal and interest loan, and at the end of the term you repay the amount you borrowed from the proceeds of the sale of the property. As with long term investment loans, it’s important to ensure that your cashflow is adequate for you to maintain loan repayments at times when the property is untenanted.
Australian tax rules allow negative gearing, so that when rental income from your investment property is less than your costs you can claim the loss as a deduction for income tax purposes. For example, if your monthly mortgage repayments are $2500 and rental income is $2000 per month there is a shortfall of $500 per month or $6000 per year that you can deduct from your taxable income and reduce your tax bill. While the possibility of savings on income tax may be attractive, it’s important to think through your investment plan if you are relying on negative gearing to increase your investment profits. You need to do your calculations to be sure that you will be able to keep up loan repayments if interest rates rise, check that prices are rising for similar properties in the chosen area, and remember above all that a tax saving only comes about as a result of a larger loss.
Knowing the types of loan suitable for investment properties is your first step towards finding the loan that best suits your investment strategy. Please contact us to find out more about investment property loans.
Related posts:
- Buying your First Investment Property Guide
- Buying Investment Properties.
- Things to know about buying an investment property
- Investment Property Financing
- HSBC Investment Property Home Loan – Buying Investment properties with HSBC
- Property Investment Strategies
- What is the best investment property strategy?
- Can I afford an investment property?
- Westpac Fixed Rate Investment Property Loan
- Effective Property Investment Strategies
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