Are you building an investment property portfolio? John Symond from Aussie Home Loans answers a reader’s question: Should I buy one bigger investment property or two smaller ones?
Q: I’m planning on buying an investment property. I have almost $100,000 as a deposit and I have home loan pre-approval to borrow $500,000. Would I be better off buying one investment property for $600,000 or two for $300,000 each?
A: Buying an investment property can be a great way to grow your wealth, and thinking about the best way to maximise your investment property ROI is a good place to start.
As a first time investor, jumping in with both feet and buying two properties may be a bit overwhelming. It all depends on how prepared you are and ensuring that you’ve done your research and added up all the costs.
Here are a few things you can do to help you determine the best approach to building your investment property portfolio.
Work out your investment strategy
Before buying an investment property, you need to know your investment strategy. Are you buying for capital growth or rental return? Do you need to be positively geared so the rental return on investment property covers your mortgage repayments and other expenses, or negatively geared so you can claim some tax benefits?
Working out your investment property strategy might make your choice between one or two investment properties really easy. For example, properties with high capital growth are often negatively geared and more expensive to purchase because they’re in popular areas, so if this is what you’re after it might rule out the possibility of buying two investment properties.
Calculate the costs
It sounds like you have a healthy deposit and borrowing power, but you need to keep in mind there are a lot more costs associated with buying, managing and maintaining investment properties. While some of these costs may be tax deductible, you still need to have the cash flow to pay these bills when they’re due.
Some of the costs to keep in mind when buying an investment property are:
- Stamp duty: A costly component of any property purchase, stamp duty is worked out differently in each state, by the type of property purchased. It may be reduced by government grants. Stamp duty can significantly add to the cost of buying property, so make sure it’s factored into your budget by using the relevant stamp duty calculator in your state or territory.
- Conveyancing or solicitor fees: Fees can range a lot for the legal advice and paperwork associated with buying property; double the purchase means double the expense.
- Building and pest inspection reports: Part of your due diligence when buying a property, inspection reports are important but can add up if you need to do a few on different properties.
- Lenders Mortgage Insurance (LMI): If you’re borrowing more than 80% of the property value when buying an investment property, you will typically need LMI. This can be paid up front or added to the overall home loan, which will reduce what you have left over for your property. There can be ways to save on LMI, and it also may be tax deductible.
- Mortgage application fees: You might not have any ongoing fees with your loan, but generally there are mortgage application fees that can add up to a couple of thousand dollars for each home loan you get.
- Ongoing property expenses: Council fees, water rates and strata fees are all regular expenses that you will need to factor into your budgeting.
- Property management and maintenance: Don’t forget about costs associated with securing a property manager, marketing for property for rental, finding good tenants and any ad hoc property maintenance that will be required from time to time.
Seek expert advice
Before making any big investment decisions, it’s smart to speak with the experts. A financial adviser and tax accountant who are experienced in property investment can help you do some calculations and offer personalised advice to help you make an educated decision and maximise your investment property ROI. An accredited mortgage broker might also have some ideas and tips on how to save on LMI and structure your loans to maximise your investment too.
You can also find out more in Aussie’s free downloadable Property Investing Guide.
Do you have a home loan or property-related question for John Symond? Leave it in the comments below and check back each Sunday to see if your question has been answered!
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