Buying your first investment property is a major step on the property ladder, but it’s an entirely different process to purchasing your dream home.
Investment properties are designed to provide you with financial security into the future, so here’s what you need to consider as you weigh the pros and cons.
Your financial aims
Investment properties are usually purchased to build your wealth into the future through capital growth. But along the way there are two sets of financial circumstances that buyers tend to have in mind;
- The property will improve your cashflow through positive gearing, or
- Will decrease your tax bill via negative gearing.
Positive gearing is when the rental income of your investment property covers items like loan repayments, maintenance, rates, and body corporate fees, and still leaves you with change (an income) in your pocket.
Negative gearing sees all these items incur a financial loss that you write off against your taxable income to decrease your annual tax bill.
If you’re looking to purchase an investment property you should consider your financial circumstances and aims carefully, perhaps speaking with an advisor first.
Initial costs for buying an investment property are pretty clear cut. You will need to use equity in your current property as the deposit or fund it via savings. Then there’s the ongoing cost of the mortgage.
Mortgage and interest
At present mortgage rates are low, making investment properties an attractive proposition for purchasers. Any buyer needs to consider how they would fare if interest rates were to rise, and should note that loan costs for investment properties are generally higher than owner/occupied houses.
Meanwhile, an investment property needs to be well-maintained to attract prospective tenants. This should be considered as you look at properties, with upgrades, replacements and general maintenances factored into your investment costs.
In addition to mortgage repayments and maintenance there will be the ongoing cost of rates paid to the local Council, and often these are also slightly higher for investors than owner/occupied properties.
Strata title properties incur a further annual expense of body corporate fees. This involves a sum that’s paid and held in trust for maintenance, upgrades and future works of a strata title property.
One of the major aims of any investment property is to enjoy capital growth. Effectively this means buyers have good reason to believe a property will rise in value during the life of ownership.
Selecting a property that’s likely to enjoy good capital growth involves careful research about what a suburb is likely to do. That involves looking into everything from future government plans for a region, to rental trends, demographics and more.
A solid strategy
Many people have built a solid income and asset base via purchasing of investment properties. Like any financial decision, it’s about doing your research and weighing the pros and cons for you individual circumstances first.
About SJ Realty
SJ Realty specialises in real estate within the Macarthur region. We boast a wealth of insight into the current and future position of property in a region that has been flagged by the government for major growth.