Investment property is an excellent way of investing and if you follow the steps below, you should be able to buy an investment property like a pro.
Step 1: Find out how much you can borrow
This will set the stage for you to plan on the kind of property you can afford with the budget you have. Lenders will also consider the potential rental income you will receive and include that to calculate your borrowing capacity. Different lenders will use different percentages of rental income to calculate how much you can borrow and hence talk to us to understand which option suits you.
Step 2: Find out how much you need for a deposit
Once you know how much you can borrow, the next step is to understand how much you need to contribute to buy the property. Generally, you will need 5% to 10% of the purchase price as your deposit plus costs. A few costs that you can incur include:
- Stamp duty and other Government charges
- Valuation fee
- Application fee
- Conveyancing and legal fees
- LMI (if you are borrowing more than 80% of the property price)
Step 3: Research your home loan options
Investors typically have the same options that are available for any home buyer. Some of the favourable features for investors include
Line of credit loans – In simple words, LOC is like a giant credit card which can help you tap into the available equity to use for investment property purchase.
Interest only loans – Some investors prefer to make interest only repayments to free their cash flow while holding onto the property for short term. These investors focus on holding the property short to medium term for capital growth purposes.
Interest in advance – Some investors prefer to pre-pay the interest in advance for the year.
Different repayment options will suit different investment strategies.
Step 4: Get loan pre-approval
Loan pre-approvals help you stay within your budget and to have the confidence that you can buy that dream property quickly. A proper pre-approval is obtained by providing all necessary documents to your lender upfront. This will save time and effort needed for full approval.
Step 5: Find a suitable property
Before you choose a property, consider the following:
1. Location: This is the most important criteria to consider if you are serious about your investment property. You really need to understand your goals before you can choose a location.
2. Infrastructure: Is there appropriate infrastructure in place like cafes, schools, parks, public transport and so on.
3. Demographic: Is the property suitable for the kind of people who will live in the area. E.g. Are there good parks, schools and childcare for families with children?
Before you enter into any negotiations, find out possible information like tenancy rate and arrange for building and pest inspections (for old properties). Insurance is a main consideration when you are buying an investment property. Make sure you are well protected in case of emergency. You may also want to organise a property management service, if you have not already done so as part of the purchasing process.