Questions To Ask About Property Investing

Property investment offers a pathway to building significant long-term wealth if done right and we’re seeing increased activity in this space . The key to success lies in having a long term strategic plan and making commercial rather than emotional decisions.?

Working with a range of homebuyers from those buying their first home through to seasoned property investors, we’re asked all sorts of questions, here are some of them:

Is Property Investment Right for Me?

Before diving in, critically assess your current financial position, especially your cashflow. Understand how much you can afford to spend each month to cover the cost of holding an investment. Consider what changes you may experience in the next 3 to 5 years and the next 7 to 10 years. If you’ll have a period of time on one income, or have private school fees to fund, develop a plan for how you’ll manage these periods. You want to be able to hold a property long enough for it to deliver results for you.

Understanding your tolerance for risk is also important. There is no reward without risk, so considering how you’ll manage a period of time without a tenant, a period of high interest rates, or a property requiring repairs may help you to get comfort that you can ride these times out, again so that you know you can hold a property long enough to get a return.

I’m about to buy my first home, I know I want to invest in property in the future, should I even be thinking about Property Investment now?

Before you buy your first home is a great time to learn about property investment and to give your long term property plan some thought. If there is a possibility that your first home may be retained as an investment property, there are some great ways to structure your finance to your benefit later when it’s rented out. It may also inform how much you choose to spend on your first home so that you keep your options open for later.?

If you’re buying property earlier in your working career, developing a plan and some goals early can help you be intentional about what you’ll do with future income increases. If you don’t want these to disappear into lifestyle, you’ll need to be intentional. Having some long term goals can help you make decisions in those moments that support your future wealth.

The value of my home has gone up and I’d like to look at buying a rental property, how does using equity work?

Equity is the difference between your property’s current market value and the outstanding mortgage balance. While your equity is the full difference, the amount of equity you can use to support additional borrowings is generally limited to 80% of the lender valuation of your property less the balance of the outstanding mortgage.?

This equity is accessed by raising an investment loan secured against your home, typically used to cover 20% of the purchase price of the investment property plus costs like stamp duty, buyers agents fees etc. The balance of the purchase price is funded by loan against the property you’re buying.

Using equity to invest allows you to get into the investment property market without having to save a deposit, especially if you have a home loan to focus on paying down. It does mean that there is a higher level of gearing which comes with higher interest payments, so your investment property will cost more to hold each month. Essentially you’re making your contribution to the investment over time, rather than upfront.

Using your equity requires good finance structuring to manage both risk and future flexibility, a personal finance strategy consultation with your mortgage broker that takes your circumstances into account is highly recommended.

Should I be paying principal and interest or interest only on investment property loans?

The optimal strategy for each investor will depend on a couple of factors, including whether you still have a home loan and how many properties you would like to hold in your portfolio.

While some investors prefer to pay debt down over time, Interest-only loans have a lower monthly cashflow demand. Where you still have a home loan to pay down, this allows any surplus cash to be used to pay down the home loan (non-deductible debt) first. Interest only repayments can also allow investors to manage the cashflow impact of holding a larger portfolio. From a finance perspective, the borrowing capacity hurdle is higher for interest only is higher as most loans will convert to principal and interest after 5 to 10 years and this needs to be factored in. It’s key to understand how the various options support your personal strategy and goals.

What ownership structure / entity should I buy property in? Do I need a Trust?

Properties can be held in one person’s own name, in joint tenancy as a couple, as tenants in common (as part of a couple or with others) in a trust, a company or a Self managed super fund. Each structure affects taxation, asset protection, and estate planning differently and there can be significantly different lending policies and processes.

The optimal structure depends on your specific financial situation and long-term objectives. The ownership structure of a property can be extremely expensive after the fact, so this is a key area to seek?input from your team of experts working together - your mortgage broker, your accountant/ tax advisor and in some cases your solicitor who looks after your wills- to help you choose the structure that will be most beneficial for you.

These are just a few of the more common questions I’m asked regularly, if you have others, please drop them below or reach out for a personal consultation. We love talking all things property and finance and helping our clients explore their options.