So you're thinking of buying an investment property?

Investing in property is a big deal for Aussies looking to grow their money. Loads of folks have boosted their bank accounts by buying, renting, fixing up, building, and flipping properties. It's a solid way to make some cash on the side or prep for a cozy retirement.

But let's be real, diving into property investment can be pretty daunting, especially if you're new to the game. There's a bunch of tricky stuff to wrap your head around, and getting started ain't always easy, especially since houses usually cost more upfront compared to stocks and stuff.

Anyway, investing in property is a major move, so you gotta nail it from the get-go.

That's why Cercle Property put together this guide. It breaks down everything you need to know to kick things off, sharpen your skills, and eventually become a pro in property investment.

It's meant to give you some basic tips and tricks about investing and help you feel more confident about making property decisions.

Where to start

So, the first thing you gotta do before diving into property investing is figure out why you're getting into it. Lots of folks jump straight into searching for properties to buy without really nailing down their reasons for investing.

Now, for most of us, it's all about making some cash and building up our wealth. But hey, there are all sorts of goals and strategies out there, and everyone's got their own idea of what "success" looks like.

For example, if you're aiming for long-term gains, you'll be eyeing different properties than someone who's after quick, steady income. And let's not forget, if you're tight on time, your approach might be totally different from someone who's ready to get their hands dirty.

But hold up, before you go any further, it's crucial to understand where you stand financially right now, where you wanna be down the road, and how property fits into the picture.

To get into property investing, you'll need some dough upfront, plus a good grasp of how to manage your cash flow, boost your income, cut back on spending, and handle debt and equity.

Now, onto the next step: research and learning. This means digging into what's happening in the real estate game overall—like market trends, lending rules, population growth, job stats, taxes, and all that jazz.

You'll also wanna zoom in on specific areas—cities, neighbourhoods, you name it—and crunch some numbers. Look at stuff like average sale prices, rental rates, how long properties sit on the market, and vacancy rates.

And hey, the learning doesn't stop there. It's a lifelong journey. You gotta keep educating yourself on different investment strategies, how to manage your cash flow like a pro, and what taxes you'll be facing as a property owner. The more you know, the better equipped you'll be to make smart decisions.

Once you've nailed down your goals, got a handle on your finances, done your homework on the market, and saved up some cash for a down payment, you're ready to take the plunge.

Now, about that cash... The amount you'll need depends on a bunch of stuff—like the price of the property you're eyeing, how much rent you expect to pull in, and whether you're gonna be making more than you're shelling out each month (that's what we call "positive cash flow").

Usually, you'll wanna cough up at least 20% of the property price as a down payment. So, if you're eyeing a place that's half a mil, you're looking at $100,000 down. Double that for a cool million.

But hey, if you can't swing that much upfront, you might still be able to get in the game. Just be ready to pony up for something called lender's mortgage insurance—it's a bit of extra cash tacked onto your loan to cover the lender's backside if you can't pay up.

And remember, you gotta have enough cash flow to cover your mortgage payments. Ideally, that's coming from the rent you're charging your tenants. But sometimes, you'll be kickin' in some of your own dough to make up the diff.

Whether you're looking to invest or snag your own place, saving up that initial chunk of change is gonna be the tough part. So, if you're eyeing property investing, start squirrelling away those pennies now.

How to use equity to buy an investment property

Alright, so if you already own a home, you might be sitting on a golden opportunity to dive into property investment sooner rather than later. See, homeowners can tap into what's called equity in their home to help fund a deposit for another property.

To figure out how much equity you've got, just take the value of your home and subtract what you still owe on your mortgage. Whatever's left over—that's your equity, baby.

Now, if you wanna get a better idea of what your home could fetch on the market, you can reach out to your local agent or property professional. They're always happy to lend a hand.

The cool thing about using your equity is that you don't have to sell your home to access it. You've got a few options:

• You can beef up your existing loan.
• You could take out a second loan on your property.
• Or you might consider refinancing with a different lender.

But here's the scoop: whichever option you choose, it means you're borrowing more money, which beefs up both your bank balance and your loan amount. So yeah, don't forget that you'll be paying extra interest on that cash you're using for the deposit. It's all about keeping an eye on your cash flow.

Now, here's the lowdown on things to consider: Banks might be a bit cautious about lending you more than 80% of your property's total value. They're playing it safe to make sure you don't end up owing more than your property's worth if the market takes a dip.

And lemme tell ya, that's not a fun situation to be in. If you suddenly gotta sell, you could end up having to fork out extra dough to cover the balance on your loan. So don't count on accessing every last bit of equity in your home.

Oh, and one more thing: Be smart about picking your lender for the investment loan. If you stick with the same one you've got for your home, they might cross-securitise your loan. That's when they tie the loan on your new property to the value of your existing one.

Cross-securitisation can be a bit of a headache. If you default on your investment property loan, the bank could swoop in and force the sale of not just your investment property, but your home too, to cover the costs.

Plus, it kinda ties your hands when it comes to shopping around for better deals or switching lenders down the road. So, keep all that in mind when you're weighing your options.

What is the property cycle and how does it work ?

So, you've probably heard that property prices go through these cycles, right? But what's that all about, and how can you make it work in your favor?

Basically, in Australia, property prices tend to go up and down over time, with an overall upward trend in the long haul. This cycle usually lasts about seven to ten years and has four main phases.

First up, there's the Boom phase. This is when prices start climbing, slow at first, and then they really take off. Everyone's buzzing about property during this time. Loans are easier to come by, interest rates are lower, and houses are selling like hotcakes, often for more than sellers expect. Investors especially jump in, expecting prices to keep going up.

Then comes the Peak. Prices hit their highest point, but things start to shift. Homes might become too expensive for a lot of folks, and more people start putting their properties up for sale, hoping to cash in on the high prices.

Next, we've got the Downturn. This is when prices either start dropping or they just level off because there are more sellers than buyers. Getting loans or borrowing money can be tougher now, and if buyers can't meet sellers' prices, homes sit on the market longer and prices continue to slide.

At the bottom of the cycle, fewer properties are up for sale, but there are still buyers on the lookout for bargains. Eventually, the low supply and increasing demand set the stage for the Recovery phase.

In the Recovery phase, prices have been low long enough for people to start feeling confident about jumping back into the market. Buyer enthusiasm picks up, and we're back to another boom.

So, when's the best time to buy? Ideally, you want to snag a property at the lowest point in the cycle, because that's when prices have the most room to climb. But here's the tricky part: it can be tough to get a big loan at that time, and it's hard to know exactly when the market hits rock bottom. Plus, there might not be as many properties for sale, and people might be feeling pretty pessimistic about the market.

Remember, though, property is a long-term investment. If you hold onto it for a while—like, say, 20 years instead of just a few—any short-term ups and downs aren't as big of a deal.

And keep in mind that different cities and states might be at different points in the cycle. While one place might be in a slump, another could be booming. So, it might be worth considering investing outside your hometown.

How to Choose a property

Depending on what you're aiming for with your investments, you can find a suitable property in lots of different cities and towns across Australia. Whether you're after long-term wealth, passive income, retirement planning, or a mix of these goals, it's important to think broadly about what you want to achieve.

When it comes to finding the right property, a few key factors come into play. While not every good investment property will tick all these boxes, keeping these fundamentals in mind can help guide your search.

First up, let's talk about location. It's often said that this is the most crucial aspect to consider. Most property experts agree that a property's location has the biggest impact on its value over time. Land values tend to rise because, well, there's only so much land to go around, right? And as the population grows, demand for housing increases, pushing prices up too.

Another biggie is employment opportunities. Areas near job hubs are usually in high demand because people prefer to live close to where they work. Think about it: who wants to spend ages commuting every day? Inner suburbs near major employment opportunities often have higher property values because of their proximity to jobs.

But it's not just any jobs that matter—it's the kind that pay well. Major cities with diverse industries tend to attract higher earners, who can afford to spend more on housing or pay higher rents. This competition for desirable homes drives up prices.

On the flip side, some places rely heavily on just one industry, like mining or tourism. While this can lead to a property boom if things take off, it also means there's a risk if that industry goes south.

Transport connections are another important factor. You don't necessarily have to live right next to a job hub if you've got good transport links. Being able to hop on a train or a freeway and get to work quickly makes a neighbourhood more attractive. Plus, upcoming infrastructure projects can make a suburb even more desirable, especially if it's been lacking in transport options before.

What to look for in an ideal suburb

?When it comes to picking the perfect suburb, there's a lot to consider. In a big city or even a sizable town, you can drill down into different regions, suburbs, and even specific streets to find the best spots. But nailing down the right suburb or neighborhood is key, because that's where the real growth potential lies.

Thinking like a homeowner rather than just an investor can be a smart move. After all, owner-occupiers outnumber investors by a long shot, so what they want in a home has a big impact on price growth over time. It's smart to pick a property that appeals to a wide range of buyers, especially families and couples, to maximize your chances of solid growth.

So, what should you look for in a suburb or neighbourhood? Well, ideally, you want a place that's mostly residential but still has plenty of perks nearby, like parks, cafes, restaurants, and maybe some nightlife. Being in a good school zone or close to reputable schools is a big plus too. And of course, quiet, safe areas with low crime rates are always in demand.

Now, you might not be able to snag a place on the fanciest street in the hottest suburb, but getting as close as you can to those sought-after areas—maybe in a neighbouring suburb—can still boost your property's value.

On the flip side, there are some things you'll want to steer clear of. Properties on busy streets, near industrial zones, or under flight paths tend to be less appealing to buyers, so they might not see as much growth in value. And areas with traffic jams, lousy transport options, or high crime rates are generally best avoided.

So, when you're scoping out potential suburbs, keep an eye out for these features:

Things to Look For:

• Lots of job opportunities nearby
• Parks, beaches, and outdoor spaces
• Good schools or a top-notch school zone
• Cafes, restaurants, and shops
• Easy access to public transport

Things to Avoid:

• Industrial areas or noisy neighbors
• Living under a flight path
• Chronic traffic problems
• Lack of transportation options
• High crime rates

By keeping these factors in mind, you can zero in on a suburb that's not just a good place to invest, but a great place to live too.

What to look for in an ideal investment

So, once you've settled on a location, the next big step is picking the right investment property. Sure, your budget will play a big role here, but there's a bunch of other stuff to think about too, like what type of property suits your strategy best and what features matter most to you.

First off, let's talk about the age-old dilemma: house or apartment? Apartments are usually cheaper and more common in urban areas, making them a popular choice for investors on a budget. Plus, they often bring in higher rental yields, which can mean a nice cash flow. But houses tend to appreciate in value more over time, thanks to that sweet, sweet land they sit on. And bonus: you've got more options for development, like adding extra dwellings or sprucing things up to boost value.

On the flip side, apartments might not hold their value as well, especially in areas with lots of new development. Plus, they come with those pesky strata fees. But hey, at least you don't have to worry about maintaining the whole building.

Then there are townhouses, duplexes, and villas—kind of a happy medium between houses and apartments. They're usually easier to maintain than a standalone house and can be a good compromise if you're not sold on either option.

Now, let's talk features. When you're scouting for the perfect investment property, keep an eye out for:

Good stuff to look for:

• Lots of natural light
• Outdoor space for days
• Multiple bathrooms, especially if you're eyeing up families
• Parking, because nobody likes fighting for a spot
• Bedrooms that match your target renter's needs
• Low maintenance (you've got enough on your plate already)
• Wide appeal to renters
• A chill, quiet street vibe

Stuff to steer clear of:

• Main roads, because nobody wants to live with constant traffic noise
• High-voltage power lines or looming phone towers—those vibes aren't great
• Neighbours peeping in your windows or encroaching on your outdoor space
• Wonky floor plans that are a pain to fix up
• Places that feel like a dungeon—natural light is key!

So, keep these tips in mind, and you'll be well on your way to finding an investment property that's not just a moneymaker but a solid place for someone to call home too.

How to find the property before its on the market

So, you wanna get the jump on snagging a property before it hits the market? Smart move! There are a couple of sneaky ways to do it.

First up, you've got what they call "off-market" properties. These babies don't even make it onto the usual listing sites. Instead, sellers and their agents keep things on the down-low, maybe reaching out to potential buyers in their little black book or through their network. Think separating couples who just want to move on quietly, estates dealing with probate, or folks who value their privacy.

Then there's the "pre-market" scene. This is like a little window of opportunity that opens up for a couple of weeks after a seller signs up with an agent but before they officially put their home out there for the world to see. During this time, the agent might give their VIP buyers a heads-up, letting them sneak a peek at the property before it hits the big time.

So, if you're keen to score a property before it's the talk of the town, cozy up to some agents, keep your ear to the ground, and you might just land yourself a sweet deal.

How to manage an investment property

If you thought owning an investment property was as simple as signing some papers, finding tenants, and kicking back while the rent rolls in, think again. Running an investment property is more like running a business—you've got to keep it profitable while providing a top-notch product to your customers, aka the tenants.

As a landlord, you've got rights and responsibilities to uphold. This means keeping the place safe and comfy for your tenants and making sure the property stays in good shape.

Throughout your ownership journey, you'll have bills to cover, issues to tackle, and decisions to make. But here's the good news: managing the property doesn't have to eat up all your time.

A lot of investors hand over the reins to a real estate agent or property manager who takes care of the day-to-day stuff. They handle everything from finding tenants and sorting out leases to collecting rent and dealing with maintenance dramas.

It's smart to pick a property manager who knows their stuff. They'll get what tenants want and might even have some savvy ideas for boosting your rental income.

Now, here's the big question: should you manage the property yourself or leave it to the pros?

Some folks prefer the DIY route to save a few bucks. And hey, about a quarter of landlords do just that. But managing a property takes time and effort, especially if you've got multiple investments on the go.

Juggling a full-time job with property management duties can be a headache, especially when emergencies pop up. Trust me, you don't want to be dealing with burst pipes when you're supposed to be kicking back on vacation.

Plus, property managers know all the ins and outs of the rental game, from lease renewals to handling disputes. They're on call 24/7 for emergencies, giving you peace of mind.

Sure, managing it yourself might seem like a money-saver, but for most investors, the hassle isn't worth it. After all, your investment property is meant to make your life easier, not add to your stress.

Oh, and here's a bonus: property management fees are tax deductible. So, you're getting a bit of a break come tax time too.

How to reduce investment property expenses

Managing investment property expenses is key to maximising your rental income and cash flow. Here are some savvy strategies to help you keep costs in check:

1. Negotiate Better Rates: Don't settle for the status quo. Shop around and negotiate better deals on everything from interest rates to management fees and landlord insurance. Regularly review your rates and consider refinancing or switching providers to keep your expenses competitive.
2. Choose Wisely: When selecting an investment property, consider your budget carefully. A more expensive property might bring in higher rental income, but it also means higher expenses like interest costs, council rates, and strata levies. Opting for a property within your means can help keep costs under control.
3. Watch Those Levies: If you're eyeing an apartment, beware of hefty strata levies. Larger, newer complexes with fancy amenities often come with higher levies. Older, smaller buildings tend to have lower levies, so strike a balance between amenities and costs.
4. Opt for Low Maintenance: Maintenance costs can eat into your profits, so choose a property that's low-maintenance. Apartments generally require less upkeep compared to free-standing houses, and newer properties tend to have fewer issues than older ones. Keep these factors in mind to minimise maintenance expenses.
5. Consider Interest-Only Loans: Interest-only loans can be a lifeline for investors, especially during the early years when rental income might not cover repayments. By only paying the interest for a set period, you can free up cash flow. Just be aware that interest-only loans may result in higher total interest payments over the loan term, so weigh the pros and cons carefully.

By implementing these strategies, you can reduce investment property expenses and boost your bottom line. Remember, every dollar saved is a dollar earned!

Some common terms you might wanna know

Investing can throw around some jargon that might leave you scratching your head. Let's break down some key terms you're likely to come across and how they relate to property investing:

Negative Gearing: This is when you borrow money to invest in property, but the interest on your loan ends up being more than the rental income you receive. Essentially, you're making a loss. The silver lining? You can deduct this loss from other income, like your wages, which can reduce your overall tax bill. Many investors see negative gearing as a strategy for long-term gains, banking on the property's value increasing over time.

Depreciation: This is when the value of assets like appliances, carpets, and blinds decreases over time. As a property investor, you can claim depreciation as a tax deduction, reducing your taxable income. Just be aware that there are rules around what you can claim, especially for assets purchased after 2017. Getting a depreciation report from a quantity surveyor can help you maximise your deductions.

Capital Works Allowance: This allows you to claim a portion of the construction or renovation costs of your property each year. For buildings constructed after certain dates, you can claim a percentage of the costs annually. This can be a significant deduction, especially for newer properties or recent renovations.

Supply and Demand: This is all about the basic principle of economics—how much of something is available (supply) versus how much people want it (demand). In the property market, supply and demand play a huge role in determining prices. If there's high demand for properties in a certain area but not enough supply, prices will go up. On the flip side, if there's an oversupply of properties, prices will likely drop. It's all about balancing what's available with what people are willing to pay.

Understanding these concepts can help you navigate the complex world of property investing with confidence. Whether you're crunching numbers, scouting for properties, or making decisions about your portfolio, having a grasp of these terms will put you ahead of the game.

Capital Growth: Capital growth refers to the increase in value of an asset over time. In real estate, it's the difference between what you paid for a property and what you could sell it for later. It's often measured as a percentage of the original price. For instance, if a suburb's median house price went up from $500,000 to $550,000 in a year, that's a 10% capital growth. Investors keep an eye on these trends to spot areas where property values are rising, helping them decide where to invest.

Leverage: Leverage is when you use borrowed money to invest, like taking out a mortgage to buy property. It's a powerful tool for investors because it lets them control more assets with less of their own money. Let's say two investors have $100,000 each. One buys a $100,000 property outright, while the other puts a 20% deposit on a $500,000 property and borrows the rest. If both properties go up by 10%, the leveraged investor sees a much bigger return because they've got more skin in the game. But remember, leverage cuts both ways—if property values drop, losses can be magnified too.?

Rental Yield:

Rental yield is a measure used to gauge the income generated by a property relative to its value.

Gross Rental Yield: This is a quick way to compare different properties on the market. It's calculated by dividing the annual rental income by the property's value. For instance, if a $500,000 property rents for $450 per week, the gross rental yield would be 4.68% ($23,400 annual rental income divided by $500,000).

Net Rental Yield: This provides a more accurate picture by factoring in expenses associated with owning the property. After deducting costs like management fees, insurance, and rates from the annual rental income, you divide the result by the total cost of purchasing the property. This includes not only the property's price but also additional expenses like stamp duty and legal fees. For example, if the net rental income is $14,400 and the total cost of purchasing the property is $521,000, the net rental yield would be 2.76%.

Mortgage interest is usually excluded from net rental yield calculations because it varies based on the owner's circumstances. Depending on the property, you might also need to consider costs for refurbishments to prepare it for rental.

Loan-to-value ratio

Loan-to-value ratio, also known as?LVR,?is used to compare the size of the loan with the value of the property, commonly expressed as a percentage. It's used by banks to determine which loan is most suitable, and whether the borrower will need to pay lender’s mortgage insurance (LMI). Investors can use it to determine the extent of their leverage.

The loan-to-value ratio is calculated by dividing the value of the loan by the value of the property. For example, if an investor owned a property worth $500,000 with a $400,000 loan, the LVR would be 80 per cent.?

When calculating LVR before purchasing a property, don’t overlook the transaction costs. Factoring in stamp duty and other fees, the total cost of buying a $500,000 property would be about $521,000. If the buyer had a $100,000 deposit, the loan-to-value ratio would actually be 84.2 per cent. This is because the investor would need to borrow the remaining $421,000 to purchase the property ($421,000 ÷ $500.000 × 100 = 84.2)

Generally speaking, a lower LVR is better because it means you have more equity in the property. A lower LVR means it’s less likely you’ll make a loss if you suddenly need to sell unexpectedly. Also, banks generally start charging lender’s mortgage insurance when LVR exceeds 80 per cent, which is a cost that’s best avoided.?

Interest Rates:

When investors borrow money, they agree to pay back the borrowed amount along with an additional fee called interest. This interest is a percentage of the total borrowed amount, also known as the principal, and it's paid annually.

Types of Interest Rates:

Interest rates can vary depending on the type of loan product and the borrower's assessed level of risk. Different loan products come with different interest rates tailored to meet the needs of borrowers.

Cash Rate:

The cash rate, set by the Reserve Bank of Australia, is the rate at which banks borrow money from each other. It serves as a benchmark for other interest rates in the economy. The Reserve Bank reviews and adjusts the cash rate on a monthly basis to manage economic conditions.

Impact on Borrowers:

Changes in the cash rate don't necessarily translate directly to changes in interest rates for borrowers. While banks often adjust their loan product interest rates in response to changes in the cash rate, they aren't obligated to do so. However, shifts in the cash rate can influence borrowing costs for investors and consumers alike, affecting decisions about borrowing and spending.

Offset Account:

An offset account is a feature often included in loans that allows borrowers to link a specific bank account to their loan. Any funds held in this linked account are offset against the outstanding loan balance, reducing the interest charged on the loan. It's important to note that no interest is earned on the funds held in the offset account.

How It Works:

For example, if a borrower has a loan of $500,000 and $100,000 in their offset account, they would only pay interest on the remaining $400,000. This effectively lowers their interest repayments on the loan.

Benefits:

Offset accounts can be utilised by both home owners and investors to decrease interest costs on their loans. The money in the offset account functions similarly to making additional repayments on the loan, but borrowers retain access to these funds at all times. They can deposit their wages or rental income into the offset account and use it for day-to-day expenses.

Comparison with Redraw Facility:

The main distinction between an offset account and a redraw facility is the flexibility it offers borrowers. Unlike redraw facilities, there are typically no restrictions or fees associated with withdrawing funds from an offset account. This makes it a convenient and versatile option for managing loan repayments and personal finances.

Equity

Equity?is the difference between the value of your property and the value of the loan. An investor with a $500,000 property and a $400,000 loan has $100,000 in equity.

Your equity can increase if the value of your home rises or if you pay off more of your loan. If the investor paid off their loan by $50,000, and the value of their property rose to $600,000, they would have $250,000 in equity ($600,000?? $350,000 = $250,000).

You can use the equity in your home for other purposes, such as a renovation, or as a deposit for a investment property.

To access the equity, you’ll need to refinance, which can mean either increasing the size of your current loan or taking out a second loan on the property. You’ll also need have your home revalued as part of the process.

It’s important to remember that when you’re accessing equity, you’re borrowing more money, which will mean higher repayments. If you are using this strategy you will need make sure this doesn’t stretch your finances too far.?

If you’re buying an investment property, look at similar properties to work out how much rental income you’ll be getting to make sure you don’t overextend yourself. Also make sure you have cash buffer to cover any unforeseen expenses such as repairs or periods when your investment property doesn’t have a tenant.

Cash flow

Cash flow?refers to the income a property generates, the expenses associated with owning it, and the net result.

Cash flow is often referred to as positive or negative. Positive cash flow means that the rental income outweighs expenses.?

Positive cash flow properties are often appealing to investors, as these properties provide a steady passive income stream. However, investors will need to pay tax on this income.

Negative cash flow means the expenses outweigh the rental income. In this situation, the investor will need to cover the shortfall from their own pocket, but may be able to claim a tax deduction.?

Whether a property has positive or negative cash flow largely depends on the investor’s individual situation, rather than the property itself. The biggest expense of owning an investment property is usually interest on the loan, so if an investor has a smaller loan, and therefore smaller interest payments, the property is more likely to have positive cash flow.

Cash flow can turn from negative to positive if rental income increases over time, or if expenses decrease because interest rates fall. However, it’s also possible for cash flow to turn from positive to negative if interest rates rise, rental income declines, or there is a long period of vacancy.

Cash flow is especially important to consider when building a property portfolio as the more properties you own, the greater the impact of any changes to interest rates or rental income will have on your overall position.?

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