Is capital growth on the rise? What about lease demand? Where should I buy it? How old is the house? These are the questions you must ask as an investor while selecting a property. Let’s start with the fundamentals.

What exactly is an investment property?

An investment property is a house purchased with the intention of producing a financial return. When the owner leases to a person or a company, this return can be referred to as rental yield. It might potentially represent future profits if the property is sold for a profit. Most individuals buy real estate for both of these reasons.

The primary purpose of an property investment is typically to grow wealth and produce passive income. This implies that the characteristics of an ideal investment may differ significantly from those sought when purchasing a home for personal use.

Property investment has various advantages, but it is critical to have a plan and make objective decisions based on what will provide the highest profits. Learn more about buying an investment property in Australia.

Here are some crucial aspects to consider to guarantee your investment is suitable.

Capital appreciation 

Capital appreciation is the regular increase in the value of a property. Investigate the growth-trend indicators for the property you want to invest in – what is the median sale price in the suburb? Has it risen in recent years?

Some agencies’ property market research tools will help you obtain a feel of capital growth in locations you’re interested in. It gives a thorough picture of Australian property and suburb trends, including previous regional sales, demographic statistics, neighboring schools, and median rental revenue.

This information may assist you in constructing a picture of what your capital gains may look like over time.

Rental yield and demand

Investors frequently want to rent their property to earn money and cover expenditures. Researching regions with high rental demand and return is crucial to determining an investment property’s financial sustainability.

Rental yield is a statistic that determines how lucrative a property may be based on predicted rental revenue balanced against the expenditures of acquiring and maintaining the property. Examples are Mortgage payments, council fees, strata fees, maintenance, and insurance. Ideally, it would be beneficial if you had a consistent, stable rental income that covers part of these expenses.

Investigating the performance history of other similar properties, such as median weekly rent, vacancy rates, average rental yield, and possible growth rate, as well as what type of properties are in demand with occupants, may aid in these calculations.

Rental yield can be estimated in both net and gross terms. The gross rental yield is the entire worth of the property divided by the estimated yearly rent and multiplied by one hundred to get a percentage.

Location

Location is a property investment cliché for a reason, and it applies equally to investors and residents. Put yourself in the spot of a prospective renter and consider what they will be searching for in a rental. The property will be more desirable to a tenant if it is close to and handy to public transportation, schools, and other facilities that are part of most people’s lifestyles, such as stores and restaurants.

In general, a neighborhood’s safety and general atmosphere are both key aspects in determining its growth potential. For example, if the area is going to undergo development that will bring more shops and cafés, or if there are large infrastructure projects that might entail more local jobs, these factors may boost the appeal and value of the property’s location.

Property type

While your budget will primarily influence whether you invest in a unit or a house, you must also consider the type of property in terms of location.

For example, a house with a backyard will likely be more tempting to tenants in a family-friendly neighbourhood than a tiny apartment. Similarly, a modern-day apartment may be in higher demand in neighborhoods near colleges, where many students usually want to rent. It is critical to understand the region’s demographics and make appropriate choices.

Houses usually are more expensive to acquire and insure and may demand extra maintenance, but they may also command higher average rentals and have faster capital growth. On the other hand, units often start at a cheaper price range and need less maintenance; however, additional charges may be considered, such as strata fees.

In reality, strata fees are one of several ongoing maintenance charges to consider when deciding whether to invest in a house or rather an apartment.

The property’s age

This is a significant factor that can influence the cost equation. Investment homes often have continuous expenses, so you want to avoid purchasing a property that would be a drain on your money due to upkeep fees.

Depending on their condition, older houses may require more upkeep; inspect everything, from the structure to the fittings and fixtures. Before you sign a contract of sale, have a professional building and pest inspection made.

If you’ve budgeted for it, you might be ready for the task of upgrading a house that requires modest repairs. However, if it requires extensive renovations, it may not be a worthwhile investment.

The property’s depreciation schedule is another way in which the property’s age will affect your finances.

Depreciation on investment property estimates how much the value of the property and its contents – including carpet, white goods, and so on – will drop over time. Based on this calculation, you may be able to claim a tax deduction.

Property characteristics

Even if you do not plan to reside on this property, someone else will. Consider the items that people often seek. A garage, additional bathrooms, or a home office area will significantly increase the rental value of the house. The layout and design of the property may have an added advantage. Is it intended for practical day-to-day use? Is there any natural light? These are all things that tenants frequently check for, so you should as well before you buy.

As you can see, most of these criteria are related to one another – the location and age of the property, for example, will affect its capital growth – As a result, before making a decision, you should consider all of these factors.

Why should you acquire an investment property?

So, you want to buy real estate? As Australians, it’s part of the vision and a popular topic of conversation at dinner parties. According to research, the national property market in Australia is worth $6.7 trillion, much above our investments in stocks or superannuation.

With national home prices rising 41.8% over the last decade, it’s no surprise that property investment strategy of purchasing has become a desire for many Australians looking to profit from capital growth and the additional rental income that property management can provide.

CoreLogic projected in 2016 that there were 2.6 million investor-owned residences in Australia, totaling a stunning $1.37 trillion. That is greater than the combined GDP of Austria and Norway.

According to the Australian Prudential Regulation Authority, about 35% of residential loans taken out in Australia in September last year were for investment homes, a staggering proportion given that the UK buy-to-let mortgage sector accounts for only 14% of new lending.

What exactly is an investment property?

An investment property is any real estate acquired to generate a return (profit) on the investment. This might be through short-term rental revenue, long-term property sales, or both.

Is it possible to consider a second house as an investment property?

If you buy a second house and decide not to live in it, you may probably claim it as an investment property. It is an investment property if your objective is to generate a return on investment, either through rental return or selling of the home following an increase in house prices. When you choose to live in it, it no longer qualifies as an investment property, and you cannot claim capital gains on it.

How do you go about acquiring an investment property?

Purchasing an investment property is no different than buying a place of abode. Check the web and local real estate listings for the region you want to buy in, or talk to a listing agent about what’s available in the locations you’re interested in.

When it comes to gaining finance from your bank, there may be a distinction between buying an owner-occupied home and an investment property. Also, when it comes to investment loans, lenders seem to be more stringent with their criteria. Investors are often charged a higher interest rate on both principal and interest and interest-only loans.

Before you acquire an investment property, you should think about the location you’re buying in and the sort of property you’re buying to guarantee it will provide a strong rental return or yield – or both.

How much capital do you have to put down on a rental property?

A 5% deposit (or more, depending on the lender) is required for a first-time investor, plus additional funds for fees and expenditures such as stamp duty.

Investors who own one or two homes tend to take a 20% deposit from the equity in one of their current properties to use as a deposit on the next one.

This implies they won’t have to pay Lenders Mortgage Insurance (LMI). Lenders take out LMI to protect themselves in the event that the borrower fails on the loan. Lenders typically charge the borrower a one-time fee to cover this insurance if the loan amount exceeds 80% of the value of the mortgaged property.

Is it possible for you to live in your investment property?

If you live in your investment home, it ceases to be an investment property and becomes your primary residence. Even if you only do so for a short time, you must declare it to the tax office since any costs you incur on the property are no longer tax deductible.

Is a rental property tax deductible?

On an investment property, you can claim a variety of tax breaks, which are detailed below.

What may you claim for your rental property? According to the ATO, property investors can claim a variety of costs on their property, including:

Management and maintenance expenditures, such as:

• Recruiting new renters
• Fees and levies imposed by the body corporate
• Council fees
• Charges for water
• Land taxation
• Cleaning
• Lawn care and gardening
• Pest management
• Insurance (building, contents, public liability) (building, contents, public liability)
• Fees and commissions for real estate agents
• Maintenance and repairs
• Legal fees, such as the cost of evicting a non-paying renter and the costs of filing a lawsuit for loss of rental income.

Interest costs, which include the interest paid on the loan you utilized to:

• Invest in a rental property.
• Get a depreciating asset for your rental home (for example, to purchase an air conditioner for the rental property)
• Make necessary repairs to the rental property (for example, roof repairs due to storm damage)
• Finance improvements on a rental property that you currently rent or want to rent out.
• Purchase land to construct a rental home.

Can I claim the cost of modifications to an investment property?

Property flippers are those who acquire houses with the express goal of renovating and reselling them. According to the ATO, if you do this, you may include your net profit or loss from the refurbishment in your income tax return, which is the profits from selling the property and other costs connected with buying, holding, renovating, and selling it.

You can even do this if you buy a house as an investment and decide to refurbish and sell it after a few years.

If you are deemed a property investor for tax purposes, any net gain or loss from property improvements is regarded as a capital gain or capital loss, accordingly.

What exactly is negative gearing?

Negative gearing occurs when the operating costs of your investment, including any interest paid, exceed the revenue generated by your investment. For example, if you charge your renter $500 per week in rent but pay $600 in mortgage payments, you’re losing $100 per week.

The net loss from negative gearing can be utilized as a tax benefit, making it an appealing choice for investors. You might also expect the property’s value to rise over time, canceling the rental revenue loss. If your home is positively geared (you earn more in rental income than repayments, for example), you will be taxed on that gain.

How much money can I borrow?

You may usually borrow up to 95% of the buying price as an investor. This implies you’ll need to put down 5% of the purchasing price. The less you borrow, the lesser risk you pose to the creditor, and the more probable it is that you will be approved.

Understanding why you want to acquire an property investment will assist you in deciding which one to buy and how much rent to charge.

Unlike purchasing a home, selecting the best property investment is simply a financial decision. As a result, it is critical to think like an investor and grasp the aims and tactics that underpin successful property investment.

First, determine exactly what you want to gain from your property investment. Many investors buy real estate for one or a combination of the following reasons.

Growing capital 

Capital growth occurs when the value of a property increases from the day it is purchased to the day it is sold. There is always the possibility that the value of your house might fall.

To maximize your capital growth over the medium to long term, you should ideally consider purchasing a suitable property in an area at the bottom of a demand cycle and holding onto it long enough for an increase in demand and for its value to appreciate. Most property markets go through ‘cycles’ in which demand and supply ebb and flow, increasing, declining, or flat average capital growth over time.

Lease or Rental yield

Yield is the ‘return’ you get on a property investment, which is usually in the form of rent. Gross rental yield is computed by totaling the income, or rent, from a property in a year and dividing it by the property’s sale price or value.

While gross rental yield is a good overall indicator, net rental yield is a more accurate assessment of your expected return. This includes all other expenditures linked with your investment, such as interest and other mortgage payments, taxes, rates, and strata fees.

Keep in mind that rental yields are subject to supply and demand fluctuations and are not guaranteed by prior performance.

Cash flow

The amount of money flowing in and out of your real estate investment is called cash flow.

Some property owners pursue a positive cash flow plan, which means that the property’s income surpasses interest payments and other outlay costs. This is often referred to as ‘positive gearing.’

Negative gearing occurs when your rental returns are less than your outgoings. You may be entitled to deduct these losses from your taxable income at tax time.

Now that you have a rough notion of what you want to get out of property investment, consider the type of property you wish to acquire and the tenant you want to rent it to.

What kind of property is it?

Depending on your budget and investing goals, you may be looking to buy a house, apartment, or vacation rental. The type of property you purchase will influence your rent and may have varying upfront and ongoing costs.

Location

When selecting an property investment, this is one of the most critical questions to address. It would be best if you were confident that the property would appreciate and provide you with substantial rental returns over time. However, you must be prepared for the possibility that the property could lose value and will not generate rental returns.

The proximity of public transportation, healthcare, food, retail facilities, childcare, education, and other amenities can significantly impact the rent you charge.

What will your tenant require?

Choose a home with attributes that appeal to the type of tenant you wish to entice. Remember that your important features may not be as significant to your tenant.

However, features such as an internal laundry, balcony, second bathroom, air conditioning, auto parking, or extra storage are frequently sought, particularly in investment properties.

You can always modify a property (subject to council consent) before or even while renting it out to increase your rental revenue potential. Small changes, such as upgrading bathroom fixtures or even applying a fresh coat of paint, can sometimes make a big difference.

Do your findings

Once you’ve selected where you want to buy, look at the sale and rental prices of comparable houses in the neighborhood to get a decent sense of your rental yield.

What inquiries should you make?

When you identify the right property, you must ask yourself the following questions in order to close the deal:

1. How long has the house been up for sale? This should be the first question in every good property investor’s mind. If a house has been on the market for months or years, it can hint that something is wrong. Perhaps the home is too expensive, or renovation work would be costly. In any event, determine the reason (or reasons) why the property is yet to be sold, so you know what you’re getting into.

2. What are the reasons behind the seller’s decision to sell the property? Always remember to ask the sellers this question as well. 

3. When did the seller purchase the home? This inquiry can be beneficial in your search for the best deal. Knowing when the property was previously listed for sale, and its age can help you appraise its value and determine whether it will require any repairs.

You must be proactive to find the best deal.

Finding the ideal property deal is undoubtedly achievable, but keep in mind that reasonable offers typically sell like hotcakes on the market. Investors are always looking for the appropriate property to boost their profits. As a result, it is critical to be proactive when locating and evaluating the best bargain. Otherwise, it may slip between your fingers.

Finally, you must be patient in your search for the best offer. You must wait for the seeds to grow after sowing them. In the meantime, you can browse the internet for other properties. The internet’s digitalization has made the real estate industry considerably more accessible than it was previously.

Keep in mind that there is competition in the real estate market, so make your judgments quickly and efficiently. The ultimate goal of real estate investment is to create a profit, and as the adage goes, “time is money.” As a result, patience, promptness, and efficiency are essential when looking for investment homes.