Despite skyrocketing property prices, investors are snapping up properties across the country, partly spurred by the ongoing low interest rates and a fear of missing out. But is it always a good idea to invest in property? The answer to that question depends on where you are buying and what you plan to do after purchasing the property. It’s a lesser-known fact that property investments are not always profitable. Therefore, your investment journey should not be based on the fear of missing out but on pure numbers to get your money’s worth.
Here’s a list of five things to consider before you decide to add real estate to your investment portfolio.
1. Why are you buying?
Property investment is a long-term strategy of wealth creation, and you must plan well before you dive into it. Investors typically hold on to a property for at least eight to 10 years before selling it off to benefit from the appreciation in its price. If you decide to sell soon after purchasing, you could be paying some heavy costs out of your pocket, including tax and legal fees. This could even lead you to lose money, unless the property has seen tremendous capital growth in the short period you owned it.
2. How much can you spend?
Before you start looking for properties, it’s advisable to calculate how much you can borrow and what you can actually afford to spend. You may be able to borrow up to 70% of a property’s price, depending on the lender you apply with. However, your borrowing capacity may be lower if you are already paying off a mortgage. Besides calculating how much you can borrow, it’s also worth running the numbers on your household budget to estimate how much you can afford to repay to avoid stretching yourself too thin financially.
3. Where should you buy?
Do not commit to buying a property without doing your research. It’s generally advisable to purchase an investment property in a suburb that’s close to public transport, schools, and other family-friendly infrastructure – as these features are generally important to tenants. It’s also important to compare data on capital growth trends, vacancy rates and rental yields in your chosen suburbs. You could check data released by independent property sources for this information. Many online sites offer free property reports with historical data, including the sale price of various properties in the neighborhood, which could help you negotiate the right price with the seller.
4. What if the property isn’t perfect?
If you find a house at a good price in a high-growth suburb, you may want to snap it up even if you don’t like a few things about it. But fixing structural defects could increase your costs significantly. That’s why it’s important to use your head and not your heart while deciding which property to buy.
It’s always a good idea to hire a professional to inspect the house to find any defects that could turn into major issues at a later stage. You can also request a pre-settlement inspection to make sure you receive the house in the same condition as agreed upon in the sale agreement.
5. What are your financing options?
Investors often prefer to use their home equity to finance an investment property. Equity is the difference between the value of your home and the mortgage amount owed on it. If you have paid up a part of your mortgage or your property has increased in value, you are likely to have built some equity that can be used to finance your second home.
Most lenders will allow you to use up to 80% of the available equity to cover a part or all of your deposit requirement for the new property. It’s also possible to use your existing home as security to cover the deposit requirement for your investment property. While these options can help you climb the property ladder faster, there are risks involved if you are unable to keep up with your repayments. It’s worth speaking with an expert, such as a mortgage broker, to understand your available options and the associated risks before entering into any financial arrangement.
Having an experienced mortgage broker on your team can make your investment journey smoother by helping you find the best deals for you and also delay hitting the serviceability wall. It’s also worth hiring a property manager to find tenants for your property and resolve their issues in your absence.
If you have queries around a home loan product or want to learn more about using your home equity, it could help to speak with a broker or ask a Hashching expert for their opinion.