How to buy an investment propertyPUBLISHED : | UPDATED:
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Putting it all together ... work out what kind of loan is most appropriate – fixed, variable or a mixture. Photo: Phil Carrick
From reality checks to handing over cheques, there’s plenty to consider before you take the leap. Here are seven simple steps:
1. Reality check
Property can be a powerful investment but you need to be careful. Overleverage yourself and you can get into danger. Double-digit yields may once have been possible, but these days (as at 2012) 5 or 6 per cent is closer to the mark.
2. Check your home equity
Most people use the equity in their existing house as security to get around the need for a deposit (if your house is valued at $650,000 and your remaining mortgage is $300,000, your home equity is $350,000).
3. Work out much can you borrow
With your home equity of $350,000, your debt is just 46 per cent of the value of the property. You can apply to your bank to borrow up to the 80 per cent loan-to-value ratio, or $220,000 – not a lot, but it does give you an idea of the sums.
4. Understand your costs
It’s just as necessary to use a solicitor or conveyancer for an investment property as it is when you buy your own home.
You also need to pay for stamp duty, inspection reports, mortgage insurance and building and contents insurance. Landlord insurance is also worth considering.
5. Mortgage check
Interest-only loans are designed for investors focusing on capital gain. Line of credit and split purpose are useful but could affect your tax deductibility if you use line of credit for day-to-day expenditure, something the ATO watches.
6. Location, location, location
In our example, $220,000 doesn’t sound like much but have you considered regional areas or interstate? Check out market reports from the likes of APM, RP Data and SQM Research.
7. Infrastructure check
If you have narrowed down your area, you may be able to focus on potential tenants as well. If it is a university suburb, is it close to transport, amenities and everything students like to do?
Check council or state government websites for planned infrastructure improvements such as major roads, which will make an area more accessible and give you an opportunity to profit if you get in before everyone else does.
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Penny Pryor Smart Investor