Investing can be a great way to build wealth. From generating a passive income to appreciating in value over time, there are several different strategies investors use when it comes to real estate.
While it has its upsides, investing in real estate has its challenges and considerations, too. Here’s what you need to know.
Why invest in real estate?
For most investors, the end goal is to grow their wealth. Here are just some of the ways real estate can help to generate wealth:
Financial stability and long-term growth: Depending on how you structure your investment, you might be able to generate passive income from real estate and long-term asset appreciation.
Diversification: If you already own other investments, like shares and bonds, investing in property can help you balance out your portfolio. A portfolio with a series of assets and securities is widely-considered as a way to keep your eggs in multiple baskets, so to speak.
Tax benefits: There are a number of different tax deductions you can claim on an investment property, including mortgage interest, depreciation, property management expenses and maintenance costs.
While property investment can offer a range of financial benefits, it also comes with several risks that we’ll touch on shortly.
Key steps to prepare for real estate investment
When it comes to buying an investment property, the key is to be prepared. From understanding your finances and researching the property market to defining your investment goals, here’s how you can get into real estate investing.
Assess your finances
Before buying an investment property, it’s essential to have a clear understanding of your finances.
Start by determining how you’ll fund the deposit. If you already own a home, you might use your equity as a deposit. Alternatively, if you’ve saved enough, your savings can be used. While most banks prefer a deposit of at least 20%, some lenders may accept less. You can chat to one of our mortgage brokers about low-deposit loans to see how you can access them, but remember that a lower deposit usually incurs lenders mortgage insurance (LMI).
Lenders will also assess your credit score and income stability during the application process.
If this is your second property, you’ll need to show you can manage (or service, as lenders refer to it) two mortgages at once. Lenders will look to apply tests to ensure that you’ll even be able to manage them during times when your investment property isn’t generating an income.
You might also be interested in: Understanding home equity
Get pre-approval
Understanding your finances and determining how much you can afford as a deposit are key steps in figuring out your borrowing capacity—the amount a lender is willing to loan you. Knowing this gives you a clearer idea of your budget and the price range to focus on.
To take it a step further, many borrowers apply for pre-approval or conditional approval. This is an initial agreement from a lender outlining how much they’re likely to lend based on your financial situation.
Pre-approval not only clarifies your budget but also boosts your confidence when making an offer. It can even strengthen your negotiating position by showing real estate agents that you’re a serious buyer.
However, it’s important to remember that pre-approval doesn’t guarantee final finance approval.
Research the market
Once you’ve got your finances in order and you know your budget, it’s time to start researching the property market. As part of the process, it’s important to consider a range of different factors, including:
Location: Location matters, especially when it comes to proximity to amenities and connectivity. Most renters are after properties that are close to schools, transport, shops and employment hubs.
Property type and features: You’ll need to choose the type of property that best aligns with your budget and investment goals. Houses, units, townhouses and apartments all offer their own benefits and typically appeal to their own type of rental demographics.
Rental market: Study rental yields in the area to understand potential income and whether it will cover costs like mortgage repayments, rates and maintenance. While you’re at it, take a look at comparable sales in the area to understand property prices and trends.
Potential return: Rental yield is one thing, but if you plan on holding onto your investment to maximise capital growth, you’ll also want to consider the area's potential for future growth. Development plans and gentrification can lead to significant property value increases over time.
Define your investment goals
Everyone has different reasons for investing, and you’ll need to land on yours before you sign on the dotted line.
Short-term property investment goals typically focus on achieving returns within a few months to five years. Common short-term investment strategies include “flipping” properties after a brief renovation or facelift, or by purchasing a property to generate short-term capital gains as it rises in popularity.
Long-term goals tend to focus on building wealth and financial security over a period of 5+ years. Capital growth is a common long-term investment strategy, but many who hold long-term property investments look for positive gearing, where the money generated from rent pays for the property’s expenses and then some.
Challenges and risks to be aware of
Just like any type of investment, investing in property comes with its own risks and challenges, including:
Market volatility: While the value of property tends to appreciate over time, that doesn’t mean that property isn’t vulnerable to market fluctuations. Depending on when you buy into the market, fluctuations and corrections could end up costing you in the short term.
Interest rates and repayments: If there’s one thing Australian homeowners have learnt over the past few years, it’s the impact that rising interest rates can have on mortgage costs and cash flow. As an investor, it’s important to make sure you can afford to cover your costs if rates rise.
Maintenance costs: As a homeowner, it’s important to expect the unexpected, including urgent repairs and maintenance for rental properties.
Tenant issues: As a landlord, there are always potential issues with tenants, including vacancy, non-payment or property damage. This could ultimately end up impacting your bottom line and the profitability of your investment.
You might also be interested in: How to make an offer on a house
Traditional and alternative routes to enter the market
Whether you’ve got a deposit ready to go or you're wondering how to invest in real estate with little money, there are so many different ways to get into property investment.
Let’s take a look at some of the ways you can enter the property market:
Traditional financing: This approach involves using a home loan to buy a property. If you’re on the hunt for an investment loan that works for you, book a chat with an Aussie lender to discuss your options.
Bank of Mum and Dad: More and more homebuyers are turning to the Bank of Mum and Dad for help buying property. From stumping up the deposit to going guarantor on loans, there are several ways parents are helping their kids get into the property market. Although the financial support can be a huge help, it’s important to make sure you’re aware of the potential risks that come with financial gifts or loans from your parents.
SMSF property lending: If you have a self-managed super fund (SMSF), you may be able to use your fund to buy an investment property. That said, investing in property through your super is highly regulated, so it’s important to understand the legal and financial requirements before taking this route.
Co-investing with friends/family: If you can’t afford to buy an investment alone, you might want to consider buying with friends or family under a joint ownership agreement. While this approach can be a great way to split the costs of home ownership, it can come with its own unique set of challenges and risks.
Using a buyer’s agent: Buyer’s agents are experts in their field. Whether you just need a hand finding an investment property or you’d like them to take care of the whole process, they’re there to work for you. Chat with one of Aussie’s expert buyer's agents to see how we can help.
