Buying An Investment Property: A Guide For First-Time Investors

Are you looking to finance your first investment property? If it is your first time investing, you may be unsure of where to start or what is involved, which is expected as it can be an overwhelming process for many! There are many benefits to investing such as the potential for passive income which will provide you with financial security in the long term. So, it is important to understand the benefits you may gain through your investment property alongside factors to consider when you are getting started.

Financing an investment property can seem daunting, but with the right guidance and resources, first-time investors can make informed decisions to achieve a successful investment.

Assessing Your Financial Situation

Before you purchase an investment property, you must have a solid understanding of your financial situation, what you can afford and the best options for your circumstances. It can be beneficial to understand where you are at with your credit score as this can play a large role in being approved for finance on a property.

Each lender and financing type will have varying requirements to be met. There will be a range of upfront costs you will be up for when initially receiving finance for your investment property, including the deposit, loan-application fee, relevant Government charges, legal and conveyancing costs, building, pest and strata fees and lender’s mortgage insurance. It is important to consider these costs when finalising your budget regarding your new investment property.

Not only are there upfront costs associated with purchasing an investment property, but there are also ongoing costs you may experience. Ongoing costs which include your specified repayment amounts, interest charges, property management fees, council rates, repair and maintenance costs, strata fees and other relevant charges such as land tax.

Understanding Investment Property Finance

Are you overwhelmed with understanding how finance for investment properties works? If this is the case, you are not alone! Investment property finance is extremely involved with many aspects to consider. When you choose a finance option for your investment property, it is important to consider interest rates which can be set as fixed or variable. A fixed interest rate stays at the set percentage, providing certainty and stability. A variable interest rate will reflect the market interest rates which may provide you with greater flexibility. Additionally, considering your repayment terms is important to plan and budget accordingly.

When you are thinking about financing an investment property, it is important to understand the concepts of positive and negative gearing. Positive gearing refers to a property that has a rental income that is higher than the cost of owning the property. This means that the owner is making a profit on their investment which is an investment strategy many people utilise to build wealth.

Negative gearing is when the costs of owning an investment property are higher than the rental income you receive from it, which means that the owner is essentially making a loss. Negative gearing is an investment strategy people may use to reduce the overall amount of tax they pay as they are focusing on capital growth.

Applying for Investment Property Finance

Applying for investment property finance can be a long and daunting process for many people, which is where a mortgage broker can assist. A mortgage broker has a wealth of knowledge and experience in property finance to assist in explaining and providing support throughout the loan application process for investment properties.

Throughout the loan application process, it is important to provide accurate financial information and documentation to ensure the process is simple, quick and successful. You will need to provide documentation such as information based on your income, credit score and personal documentation.

Investment property finance applications will consider your credit score history regarding the 5 C’s. The 5 C’s of credit included:

– Character

– Capacity

– Capital

– Collateral

– Conditions

5 C’s of credit

A lender will most likely consider aspects of the 5 C’s was assessing your investment property loan application to have an understanding of your history and your circumstances. It may be beneficial to consider these factors before applying for your finance to understand where you are currently standing.

Choosing the Right Investment Property

One of the first steps when buying an investment property is to conduct thorough research to ensure you are choosing the right one. Important factors to consider include the location of the property, market conditions and potential rental income you could receive. When considering the location of your investment property, it may be beneficial to understand:

– Whether these suburbs have price growth potential

– Proposed developments that may impact prices

– Whether renovations would be required and whether you have sufficient funds

– Understand average rental return and vacancies within the area

As mentioned earlier in the article, taking into consideration how positively geared properties can increase cash flow and long-term returns may be beneficial when selecting your investment property. As a whole, the possible tax benefits may be a determining factor in your investment property selection which is why it is important to consider your goals and the possible return.