Buying an investment property can be an excellent way to create wealth - and like any investment doing the research before you take the plunge is a critical step.
Step 1: Find out how much you can borrow
Getting an idea of how much you can borrow is the first step to buying an investment property. It gives you a general idea of your target price range, so you can narrow your property search within your purchase budget.
Lenders will also consider the potential rental income you will get from the investment property when calculating how much you can borrow.
Step 2: Calculate your loan and purchase costs
As a general rule, you will need a significant deposit for an investment property purchase, however if you have existing property, you may be able to use your equity to cover more of the deposit. The criteria for deposits will differ between lenders. A mortgage adviser can help you identify which lender will best suit your investment loan needs – that’s step three but really working out your costs and loan options go together.
In addition to your deposit, you will need to consider the following costs:
- Loan application fee
- Valuation fees
- Statutory government charges
- Conveyancing and legal fees
- Lenders Mortgage Insurance if you are borrowing more than 80% of the property value.
Step 3: Investigate your investment loan options
Property investment loans are available to suit just about any investment strategy. The common loan options for property investment include:
- Line of Credit loans - Line of credit loans tap into the existing equity you have built up in your existing property to use towards a deposit for your investment property.
- Interest only loans suit investors who are focused on achieving capital growth in the short to medium term, and often go hand in hand with negative gearing.
You’ll also need to consider your loan repayment options, some property investors choose to pay interest in advance. Different repayment options will suit different investment strategies.
Property investment loans are not too different from any other type of home loan; you will need to compare rates, features, fees and charges.
Step 4: Get loan pre-approval
Your investment loan pre-approval will give you a head start on other buyers by having your loan application pre-approved, as well as ensuring you shop within your budget.
A formal pre-approval works the same as a formal loan application, except without the security details. With a pre-approval, your lender will assess your income, expenditure, assets and liabilities to determine how much you can borrow, as well as assessing the documentation normally required to get full loan approval.
Be wary of any pre-approval that has many conditions attached to it. Your mortgage adviser can help you to apply for a formal pre-approval.
Step 5: Find a suitable property
Whether you select a residential investment property, commercial investment property, or even a holiday rental investment property there is ample opportunity to invest. Consider the following when choosing your investment property:
- Location: is the property in a location that will be well-tenanted or is likely to experience property price growth?
- Demographics: is the property suitable for the type of tenants in the area, e.g. low-maintenance apartments for young professionals?
- Infrastructure: is there appropriate infrastructure in place, such as transport, shops, cafes and schools?
- Development: is there any development planned for the area that may improve existing infrastructure, leading to possible improvements in tenancy rates or price growth?
Before you enter into negotiations for any place, find out if it was rented in the past: how much it was rented for, if there were any vacancy periods, how long it was vacant for, and why.
Step 6: Buying your investment property
Conduct relevant searches including building inspections. If you’re buying your investment property at auction you will need to complete all inspections prior to auction day.
View the contract of sale to check conditions and inclusions. Again, if you are buying at auction it is important to have your solicitor go through the contract of sale prior to making a bid.
Make an offer or bid at auction to secure your investment property purchase. Remember, you’ll need to pay a deposit if your offer or bid is accepted so be prepared to cover at least five to ten per cent of the purchase price.
You should also check that the conditions of sale you expected are included in the contract; you may want to make the sale is subject to finance and satisfactory building inspections (these conditions will not apply to a sale by auction).
Finalise your investment loan approval by contacting your mortgage adviser with the details of the property. If you have loan pre-approval, full loan approval may take only a few days. Once your loan has been approved, you will receive a formal Letter of Offer that will need to be signed and returned to your lender as soon as possible.
Settlement of your loan will then get underway, starting with the receipt of your loan documents. You will need to forward these to your solicitor, who will then liaise with your lender to schedule the settlement date. A settlement timeframe will have been set out in the contract of sale. Your first loan repayment will usually be due one month after settlement.
Don’t forget to arrange the relevant insurance, including building and landlord protection. You may also want to organise a property management service, if you have not already done so as part of the purchasing process.