Guide to property investment and investor loans

Why invest in property?

Investors are attracted to property because it is one of the best performing asset classes over the long term. 

It is less volatile than other investments like shares, and performs strongly when compared to other asset classes. Besides this relative stability, and the potential for capital growth over time, investors like the fact property is a physical, tangible investment you can relate to. 

However, you do need to educate yourself, particularly if property investment is a new concept to you. Let’s now look at the pros and cons of investing in property, so you can make an informed decision. 

Pros and cons of investing in property

Like any investment there are benefits and risks which you need to consider. 

Pros or benefits of investing in property

The many benefits of property investment include:

• You have direct control of your investment, unlike shares or funds where you may have to use an intermediary like a fund manager. You can also improve the condition of your rental property via renovations which help make it more attractive to prospective tenants.
  
• The rent you collect is a stable and consistent form of income. The constant returns can also help offset part or all of the interest on your home loan.
  
• When the income you generate from your investment property is greater than the loan repayments and property’s expenses, you benefit from being positively geared.
  
• Many of the costs or expenses involved with owning and maintaining an investment property are tax deductible, which can help make owning a rental property more affordable.

Cons or risk of investing in property

You also need to be aware of the very real risk, or cons, of investing in property:

• Unlike other investment classes - like shares, property has a relatively high entry cost especially if property values are appreciating at a fast rate. There are other costs associated with the initial property purchase to budget for, including stamp duty, legal fees, building inspections, and loan set up costs.
  
• First-time property inventors also need to be aware of the myriad ongoing costs of an investment property, first and foremost the mortgage repayments on the home loan, as well as insurance, council rates, maintenance and renovations.
  
• If you decide to sell your investment property you are likely to be liable for other costs, including capital gains tax (CGT) and real estate agent fees.
  
• If there is a period when your rental property is not occupied by tenants you could experience cash flow problems, which could impact your personal finances.
  
• If property is your main investment vehicle your portfolio may not be sufficiently diversified, and places you at risk if the market drops or underperforms.
  
• If you need access to the capital in your property and have to sell, be aware you cannot access it overnight, should you need it at short notice.
  

Now you have an overview of some of the potential upsides and pitfalls of buying an investment property, let's look at some common strategies investors take.

What is your investment strategy?

Your investment strategy should be informed by your personal financial circumstances and overall investment objectives and goals. 

Start by asking yourself what you aim to achieve - is it long-term wealth creation, passive income, a retirement strategy, or a combination of these? Many first-time investors seek out the advice of professionals like financial planners and/or financial advisors who can help plan an investment strategy that suits their circumstance. 

Investors tend to take one of the following approaches when it comes to property:

Buy and hold

The buy and hold strategy is one of the most popular long term investment strategies, where you wait for the value to rise and then sell it down the track. In the interim rental income covers some or all of your mortgage repayments until the property is sold. This approach does require you to buy in an area that is going to experience positive capital growth, which requires careful research and knowledge of the local market.

Renovate and hold

You can add value to an investment property by upgrading elements of it to appeal to prospective tenants. This could increase rental income, as well as the value and equity of your property investment - but you will need to be able to finance it. One pitfall to be aware of is overcapitalising on your renovation, which involves spending more than you can expect to get in return. Your objective should be to add value by only upgrading features that tenants will appreciate, with a close eye on your budget. 

Renovate and sell

Some investors also renovate to sell, but over a shorter timeframe than the renovate and hold approach. This is also colloquially known as ‘flipping’. To make this a successful investment strategy you need to buy a property at a competitive price. A rapidly rising property market will also help you realise a profit, though you need to carefully factor in all the costs associated with selling - like stamp duty (buying) and then real estate agents’ fees (selling).

Capital growth

Some investors make a point of buying properties in areas where the market is growing quickly. They will then hold the property for a short/medium term and sell - typically within a few years after using an interest-only investment loan to reduce their non-tax deductible costs. 

Now let’s look at what criteria an investment property should meet. 

How to choose an investment property

Finding the right property is crucial to ensuring a return on your investment. You need to locate a property that:

• Matches your overall investment strategy.
• Will retain and appreciate in value over time. 
• Is available at a price that meets your budget.
  

Your research should focus on locating specific suburbs or areas which have the greatest potential for capital growth and rental return. Key property data that indicates a high growth market includes:

• Rising property values in a suburb, over the medium/long term.
• Properties which spend a relatively short time on the market, referred to as the days on market (DOM) metric. 
• High clearance rates at auctions.
• Low vacancy rates, which indicate a tight rental market.
• Rising rental yields, which are a good sign that there is strong demand for rental properties. 
  

You should also research other practical information about an area, like how easy it is to access public transport, the standard and availability of public amenities, and how close the suburb is to employment opportunities. 

You can research key property performance and market insights on sites such as CoreLogic, realestate.com.au and Domain, to help you identify suburbs and properties that meet your criteria. 

Let’s now understand what is involved in managing an investment property.

How to manage an investment property: DIY vs property manager

You have two options when it comes to managing your investment property - DIY or using a property manager. 

Some first-time investors choose to self-manage, and underestimate the work involved in managing a rental property. Property managers - who typically charge a commission based on a percentage of the weekly rent take care of everything for you. They are the primary point of contact with your tenants, collecting bond and rent payments, managing inspections, dealing with routine maintenance requests and much more. If you choose to DIY, not only will you need to have the time to devote to these tasks, but you will also need to be aware of the latest legislation covering rental properties and tenants rights. 

Let’s now look at the concept of capital growth and rental return which are important aspects to understand in the context of the return of your investment. 

Capital growth and rental return

If your property investment is going to make financial sense you need to understand the concepts of capital growth and rental return. 

Capital growth is the increase in a property's value over time, which typically occurs over the medium to long term. Different factors impact the drivers of growth in a local market, which makes researching the area you are investing in a priority. 

Rental return is the amount you receive from renting out your property. This needs to cover the various costs of holding, managing and maintaining the property along with a portion of profit. A useful metric to look at is the rental yield of a property, which is a percentage value that reflects the difference between your rental income and your overall costs. 

Calculating rental yield: To calculate your rental yield, divide the total rent you expect to receive over a year by the price you paid for the property, and then multiply this figure by 100 to get a percentage. For example, if you purchased a property for $600,000 and are renting it out for $400 per week, which is $20,800 per annum, the gross yield would be 3.47% per annum.

Let’s now look at ways you can minimise risk when investing in property. 

Buying an investment property: Minimising your risks

There are a number of ways you can minimise the inherent risks involved in property investment, specifically: 

• Research the market, suburb or neighbourhood you are thinking of investing in thoroughly. 
• Take out income protection, life insurance as well as landlord’s insurance to protect yourself against specific events.
• Have a financial buffer in place as a contingency against any unforeseen costs. This includes periods of time when your rental property is not tenanted.
  

Now you have an idea of minimising your risk, let's look at obtaining finance for your property purchase.

Getting an investment property loan

The majority of property investors take out an investor loan to finance the purchase of an investment property. 

Investor home loan rates are applied to the loan you take out on a property you’ve purchased to use as an investment. Investment loans typically have slightly higher interest rates than owner-occupier home loans. 

Lenders take a number of factors into account before they approve an investor loan. They need to work out if you can afford to pay - or service, your monthly loan repayments. Your serviceability is based on your monthly expenses/outgoings/debts which is subtracted from all your monthly income, including any rent you may earn from your new property. They are also looking for a history of genuine savings, equity in other properties, your credit history and evidence of stable employment and income. 

Your borrowing power will depend on a combination of these factors, and determines what percentage of the property value they are prepared to lend you.

You can estimate your borrowing capacity with our handy online calculator. It will help you estimate your borrowing capacity, the value of the property you can afford and your monthly repayments.

Applying for an investor home loan with Yard

Wondering why you should consider us for your investor loan? Here is why we think we stand out:

• Our application process is hassle-free, online and free
• You get a dedicated loan consultant who works with you from start of application through to settlement
• We can provide a pre-approval that’s valid for 90 days, which gives you confidence to go to bid at an auction
  

Other features of our online home loans include unlimited additional repayments and free redraws as well as an optional 100% offset facility. You can also check what our current rates are for investors, including any specials we have running.

Armed with this knowledge you should now be in a better position to apply for an investor loan online, the first step in your property investment journey.

Have any questions about our investor loans? We’re here to help, and our friendly local team are available to chat at a time that suits your schedule.