Unloan's ultimate guide to buying an investment property

An introduction into real estate investment

For many Aussies, real estate and property investment is a popular way to build wealth. With that said, buying a property is a huge financial investment. Not to mention, there are a few subtle differences that set buying an investment property apart from purchasing a home to live in. 

To get the most out of an investment property, it’s important to have a plan in place. If you’re new to the world of property investing, we’re here to break down the ins and outs of how to invest in real estate to help set you up for future success. 

Check out our guide to real estate investing for beginners for everything you need to know about how to invest in property. 

Determining your investment goals

Before you start looking for potential investment properties to buy, it’s important to take a moment to reflect on why you’d like to get into property investment. 

For most property investors, the ultimate goal is to make a profit and build wealth, but you might have another reason for investing in real estate. Are you looking to diversify your investment portfolio? Are you looking to create a passive income stream? Or maybe you’d like to take advantage of the tax benefits that come with investing in property? 

By understanding your personal goals for property investment, you’ll be better positioned to find an investment strategy that aligns with your goals. There are a range of different investment strategies you might choose to implement, including:

• Buy and hold,
• Renovate and hold,
• Property flipping,
• Positive or negative gearing, and 
• Subdivision. 

It’s important to familiarise yourself with these different strategies to find a path that aligns with your financial goals.

Researching the real estate market

Once you’ve reflected on your goals and you understand the ‘why’ behind your decision to invest in real estate, it’s time to start researching the market. Knowledge is power, and as a property investor, it’s essential to have a thorough understanding of how property investment works and the real estate market in general.

Here are just some of the areas you should educate yourself on before investing in real estate.

Market trends

Understand the current market conditions and historical property prices in the areas you’re interested in. Check out websites like CoreLogic and Domain to view comprehensive market reports and data on property prices, trends and forecasts. You can even request a free property report from us here at Unloan. 

Economic indicators 

Evaluate the overall economic stability of the region, as well as employment rates and population projections that may drive demand and property prices. 

Keep your eye on the Reserve Bank of Australia’s (RBA) official cash rate for interest rate trends. Ultimately, as the cash rate goes up, so do the interest rates on home loans and vice versa.

Risk assessment 

Like all investments, property carries its own set of risks, so it’s important to do your due diligence. Assess the potential risks of market fluctuations and how they could impact your ability to meet your loan repayments, especially if your property is empty for a period of time. 

By conducting thorough research on market trends and economic conditions, you’ll be better positioned to make a good investment decision when it comes to purchasing investment properties.

Setting a budget and financing options

Once you’ve laid the groundwork by researching the real estate market, it’s time to start looking into the finance side of things. 

Saving for buying an investment property

First things first, you’re going to need some capital  to be able to put down a deposit for a home loan. Saving for a deposit takes time, effort and discipline, so if you’re in need of a few helpful pointers, you can check out our steps to take when you start saving for a house.

Alternatively, if you already own a property, you may be able to use the equity you’ve built in your home to fund the purchase of an investment property. 

Regardless of whether you’re using savings or equity, most lenders like to see a minimum deposit of 20%. While you might be able to get away with a smaller deposit, you’ll probably have to fork out for lender’s mortgage insurance (LMI), which is another cost to add to your tally.

Calculate your borrowing power

You can use a borrowing power calculator to get an idea of how much a lender may be willing to lend you. Or, you can take it one step further and approach a lender for conditional approval. By exploring your borrowing power or getting conditional approval, you’ll have a better idea of how much you can afford to borrow and what price range you should be looking at to buy.  

It’s also important to make sure you can afford to cover the upfront costs of purchasing an investment property, including stamp duty, building and pest inspections, land tax and registration of title, conveyancing fees, establishment fees and insurance. You’ll need to factor these costs into your budget, along with your deposit.

Investment home loans

There are a range of different types of investment loans, each of which offers its own features, facilities and interest rates. Research the different loan products available to you as a property investor. Compare mortgage options and interest rates from different lenders and consider the terms and flexibility of loan repayments, to find a loan that suits your needs.

Identifying profitable locations

When it comes to buying investment properties, typically the main goal is to make a profit. Therefore it helps to buy in an area that will help you make a bit of cash. This is where location analysis comes into play. 

Explore the growth potential and rental yield of properties in the area. Typically, homes that are close to local amenities, like schools, hospitals, public transport and shopping centres, are more appealing and can command a higher rental yield. It can also be worth looking into future plans and developments for the area that could increase property values.

Assessing potential rental income

Rental yield refers to the return you can expect from renting out the property. To calculate the potential rental income of a property, start by researching comparable rental properties in the areas you’re interested in and see what prices they’re commanding. High vacancy rates can impact rental income, so opt for an area with low vacancy rates. 

Return on investment (ROI)

Calculating the return on investment (ROI) for an investment property is a key step in determining its profitability. The basic ROI calculation method for a property involves comparing the annual net income generated by the property to the total investment cost. 

To calculate the basic ROI, you can use the following formula:

ROI = (Annual net operating incomeTotal investment cost) x 100

Where:

Annual net operating income: The difference between the gross rental income and the total operating expenses over the course of a year.

Total investment cost: This includes the purchase price of the property, closing costs (including stamp duty, legal fees, inspection fees, etc.), and any initial renovation or repair costs.

Evaluating property types and features

Another important aspect to consider is the type of property and its features. Different types of properties offer their own pros and cons. 

For example, do you plan on investing in residential or commercial property? Would you like an established property or a new build? Do you have a preference when it comes to units, townhouses or freestanding homes?

Spend time evaluating the pros and cons of these different property types and whether they provide the features you’re looking for. 

Conducting property inspections

When it comes to buying property, property inspections are a key part of the buying process. 

The photos you see online can be quite different from how the property appears in person, so it’s well worth attending open homes and inspecting the property for yourself. As you view different properties, you’ll start to get a feel for what you’re after and how much different properties are worth. Not to mention, property inspections are also a great excuse to drive around the streets and check out the local neighbourhood.

There are lots of different factors to consider when viewing a potential property to buy. Check out our blog on the 10 things you should look for when inspecting properties to learn more about what to keep an eye out for.

Negotiating the purchase price

Once you’ve found an investment property you’re interested in purchasing, it’s time to make an offer. Be sure to include any contingencies or conditions that protect your interests, like making the offer subject to a building and pest inspection and/or finance approval. 

Once you submit your offer, the seller will either accept your offer, reject your offer or provide you with a counteroffer. From here it’s time to negotiate. 

When it comes to negotiating successfully, it’s important to remain objective and not get too emotionally involved with the property. Understand your limits and when it’s time to walk away from a potential investment. Check out our blog on mistakes to avoid when negotiating to help you in your negotiations.

Managing property expenses and maintenance

Just like owner-occupied properties, investment properties come with ongoing costs. Not only do you need to fork out for your mortgage repayments, council rates, strata fees, insurance, maintenance and repairs, but there’s also the added expense of property management fees if you choose to engage a property manager.

Although it might be tempting to manage your new investment property yourself, there’s often more to managing rental properties than you might expect. Whether you choose to manage your investment property yourself or to bring in the help of a property manager, typical rental property tasks and responsibilities include:

• Acquiring and screening tenants,
• Collecting rent and managing finances,
• Maintaining and repairing the property,
• Managing tenant relations and communications,
• Ensuring legal compliance,
• Conducting property inspections and maintaining documentation, and
• Managing vacancies, advertising and property showings.

All these tasks and responsibilities can add hours of extra work onto your week. This can quickly add up if you’ve got multiple investments on the go at once. 

Having an experienced property manager on side might set you back anywhere from 3-12% of your rental income, but they can also take the stress out of managing your investment property. Plus, they’ll have a good understanding of the local property market and may be able to help you maximise your rental return. 

Understanding legal and tax considerations

As a property investor, you have to comply with a range of tax obligations and rental laws. It can be worth familiarising yourself with your obligations so you understand what the requirements are. 

Investment properties and tax

Your rental income is taxable, so you’ll need to declare it as part of your tax return. With that said, you may also be able to claim tax deductions on property expenses, including:

• Interest on your investment loan,
• Property management fees,
• Repairs and maintenance (note: these must be immediate repairs, not improvements),
• Insurance premiums,
• Council rates,
• Land tax,
• Advertising for tenants,
• Depreciation on the building and certain assets within the property (like appliances and furniture), and
• Legal expenses related to rental activities.

If you sell the property for a profit, you may be liable for capital gains tax (CGT). There are exemptions and concessions, such as the main residence exemption, that may apply. For more information on your tax obligations as a property investor, head to the ATO website. 

Legal compliance for investment properties

As a landlord, it’s essential to have a sound understanding of your legal obligations to make sure your investment is legally compliant to avoid potential legal issues.

From tenancy laws and financial compliance to building and safety standards and zoning laws, there are a number of different legal obligations that you need to be across. This is where an experienced property manager can also come in handy. They should have a thorough understanding of your obligations as a landlord to help you remain compliant.

Buy an investment property with Unloan

Whether you’re looking for a loan to buy an investment property or you’re ready to refinance your current investment loan, Unloan has you covered. For a loan that’s simple to understand and easy to live with, check out our range of great features. Plus, we also have a range of resources available in our Learn hub to help you navigate your investment property journey. 

‍

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.‍ 

Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.

Unloan is a division of Commonwealth Bank of Australia is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000.

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.