Top tips for clever property investors
Signaling the return of competition to the mortgage
market - albeit a slow return - a number of
second and third-tier lenders are working hard
for market share. Potential property investors
looking to take advantage of higher rental yields
and relaxed buyer competition should take
note that a number of these lenders
are introducing special offers for
limited periods.
Australia’s largest independently-owned
mortgage broker, Mortgage Choice
says that while tighter lending criteria
is making it more difficult
for potential buyers to borrow, there are
opportunities for those who are well prepared
and keen to shop around for a suitable loan deal.
Local franchise owner for Mortgage Choice
Peter Johnson said, “It’s not just first
homebuyers who are potentially missing
out on purchasing property thanks to
stricter lending criteria. Investors looking to
take advantage of positive market conditions
by expanding their portfolio and those
looking to invest for the first time are also
being confronted.”
“A number of smaller lenders are now
introducing special offers that all borrowers,
including investors, can take advantage of.
Reputable mortgage brokers will show borrowers
how they can meet tighter requirements
and assist them in identifying loans that can
enable them to make the most of an
investment strategy.
“Expanding a property portfolio should be
easier with the right guidance around
mortgage choice. If researched properly,
with the understanding that it is usually
best as a long term strategy, property investment
can do wonders to increase
someone’s financial worth.
“Savvy investors looking to get in the market
now or spend less time positioning
themselves further down their investment
path are already investigating all their
loan options, including loans offered by
second and third-tier lenders.
These investors are utilising all the
tips available to take advantage of the tax
benefits and financial gains offered by property investment.”
So what are the top tips? Mortgage Choice in
Sutherland provides the following
five tips to property investors:
Use the equity from another property
Tapping into your home’s equity, or equity
from another property investment,
can be a great launching platform for buying an
investment property.
According to Mortgage Choice’s latest investor survey,
60% of those looking to
buy an investment property before
mid 2011 plan to access the equity in their
home in order to fund all or part of their
investment property purchase.
How does this work? Say your home is
valued at $700,000 and you owe
$350,000 on your mortgage, you can
use the $350,000 equity in your home
to pay for up to 100% of the new property,
or if it is more expensive
you may be able to borrow more with some lenders.
Pick a loan tailored to your investment strategy
Meeting lending criteria is only half the challenge;
another big one is choosing a loan.
Think carefully about interest only vs.
principal and interest options.
Although interest only loans will not
reduce the loan amount, they do result
in smaller monthly repayments and allow
you to make greater contributions
to your principal place of residence or to
invest in another asset,
all the while allowing the investment property to
grow in value through capital gains.
Consult a buyers agent/property finder
Seek professional advice about what type of property
will maximise your investment.
Most investors want property to secure them
(as an average over the entire loan term)
an annual return on investment that is higher
than the costs eg. if net rent is 3%
and the interest rate is 7% then it only
needs to grow in value at more than
4% to be profitable. Experienced buyers
agents know the market better than most
and are a valuable resource for advice and
for negotiating with property sellers
and/or their agents.
Positive vs. negative gearing
Expenses you incur on an investment property
are tax deductible. If your loan
repayments, fees and other property-related
costs exceed your rental income,
the net loss can be offset against other
income you derive, reducing the amount
of tax payable on that income. This is called
negative gearing. Or, you may consider
positive gearing, where the annual rental
income received from the property covers
or is higher than the repayments and costs.
Consider all the costs
It is crucial to create a detailed budget
outlining your outgoings and earnings.
Property investment usually incurs unexpected
expenses and it is easy to go over budget on
improvements and repairs. Don’t fall into the
trap of relying on your property’s
income to cover additional costs such
as new hot water systems or interest rate rises.
Also think about capital gains tax you will have
to pay if you decide to sell the property.
Be sure to consult your taxation advisor.
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