Getting started

Property is a tangible investment class that has the potential to yield ongoing passive income for decades, not to mention the capital gains if you purchase in a growing suburb. Property is also an expensive investment option, tending to require a higher initial capital outlay (through the deposit and stamp duty) compared to alternative asset classes, such as listed shares.

If you’re on the fence regarding how to incorporate the property into your investment portfolio, some self-reflection may be enlightening:

What are you hoping to achieve by investing in property? 

Two common reasons why people want to buy an investment property are:

1. Having an immediate and steady passive income stream.

In this situation, rental yield % and positive cash flow are important metrics to take into account.

Rental yield = Annual rent divided by the property price. For example, if a property is rented out for $600 a week and cost $700,000 to purchase, the rental yield on this property would be 4.46%.

($600 x 52 weeks, divided by $700,000)

If the rental yield % of a given property is less than the opportunity cost (the next best alternative to investing your money), the property you are looking at may not be a suitable investment.

Positive cash flow arises when your rental income and tax benefits (i.e. tax savings from being able to deduct interest payments) exceed the costs of owning the property (e.g. mortgage repayments, government rates and taxes, property management fees, insurance and repair and maintenance).

This is very similar to analysing a property for whether it is positively or negatively geared, except that gearing factors in depreciation expenses, which have no cash impact. As such, you can have a cash-generative property that is negatively geared (the best of both worlds!).

2. Making use of tax benefits offered through negative gearing in the present day, while holding the property for capital gains (i.e. appreciation in value over a future period of time).

If tax minimisation is your primary goal, you would seek to benefit from negative gearing and capital growth.

Negative gearing reflects a scenario where your investment property generates a tax loss (i.e. rental income is less than deductible expenses). This tax loss can then be applied to other taxable income to reduce the tax payable.

If a property would be loss-making for tax purposes but does not have growth prospects, then it probably still won’t be a good investment decision. When searching for an investment property, you should be aware of external market conditions and various indicators that a property would inherently be a good purchase. E.g. If the local council of a particular suburb has big plans to invest in infrastructure, such as a new train station.

The above is meant for general information, please see a qualified accountant for advice tailored to your situation. 

Can you afford an investment property?

Whether you can afford an investment property depends on a few things:

• Whether you have a sufficient deposit (20% or more of the purchase price to avoid LMI, but there is still potential to borrow at 5%)
• Do you have sufficient borrowing capacity?
• Do you anticipate putting the money to other use in the future? For example, you may want to pay for private school tuition, have big travel plans, or expect to hold a wedding. 
• Have you factored other costs of property ownership into your budget? Other than the mortgage repayments, you would need to consider government rates and taxes, property management fees, insurance and repair and maintenance and make a judgment call on whether you will have sufficient cash to cover these.
• What do you expect to do with the property? Do you want to flip the property (i.e. buy a run-down property, renovate or rebuild, and sell it later for capital gains), lease it out straight away or renovate and then lease? If you want to lease out the property, do you want to rent it out over the long-term or use it as a short-term rental? If going with a short-term rental plan, you would need to factor in potential vacancy periods, additional insurance, repair and maintenance costs, as well as costs to prepare the property before and after checkout.
• Have you researched the market and economy? Ensure you are up-to-date on property news and that you are comfortable with how the market and house prices are trending.

If you’ve weighed up all the above factors and are keen to get your pre-approval sorted, feel free to get in touch.

Finding an investment property

So you’ve calculated your budget, obtained a pre-approval and are ready to start your property search?

Check out our 4 tips below:

• Know your investment purpose and budget, as these will impact the location and your desired property type.

For example, if you are seeking returns on investment and steady cash flow, you would want to buy a property in good condition (i.e. minimal or no renovations) and that is seen as attractive to live in by tenants. Features that tenants look for include proximity to schools and places of work, transportation, medical centres, parks and entertainment and shopping hubs. However, beware of the premium that is often charged on newly built properties, simply by virtue of being brand new.

The profile of the tenant you are targeting would also affect whether you lean towards a more metropolitan location (e.g. an apartment in the city targeted towards single people or couples with no kids), or purchase something further away from the city (e.g. a suburban house with a backyard catering to families).

Check out the different considerations when weighing up buying a house versus an apartment unit on this page.

• Don’t let emotions cloud your judgment – Look at the property as an investment rather than as a potential home. That quirky townhouse with a charming fireplace but ramshackle bathroom could cost you thousands in renovation costs.

Your benchmark shouldn’t be whether you can see yourself living there, but whether you think you can get a high enough return on your investment.

• Research the broader property market and the suburbs you are interested in – Giving yourself a broader context is useful to start off your research. Have a read of recent news articles reporting on the state of the Australian economy as a whole, and the property market of the state that you are keen to invest in.

Council development plans that have been published on the appropriate local council websites are also useful in gauging the level of government support and the likely level of investment in future infrastructure.    

Once you are ready to perform a deep dive into specific suburbs, you can use external resources such as CoreLogic RP Data (subscription fees may apply), realestate.com.au and domain.com.au to read up on suburb profiles and price trends.

JNW Finance offers free RP Data property, suburb or rental reports for our investor clients.

Inquire now for a free sample

• Ensure that you perform pre-sale inspections – Thoroughly doing your due diligence, paying for the building and pest report and retaining a lawyer to review the purchase contract are fundamental to avoiding unpleasant surprises.

Choosing an investment loan

There is a wide array of loan facilities and loan types, and you can choose to apply for these as either a home loan or an investment loan. Click here for an overview of typical property loans.

Managing your rental property – DIY or pay a professional?

Whilst it may be tempting not to think about managing your own rental, paying a professional to manage your rental property comes at a price – management fees can range from 5 to 10% of your rental income on average. The large range comes from variations in scope and responsibilities of a property manager. As such, you should clarify what tasks they will perform and make your decision accordingly.

Some of the tasks that a property manager might carry out have been listed below:

• Establishing what the market rate of rent for your property would be
• Advertising and sourcing tenants
• Conducting property inspections
• Providing renovation advice in order to increase the attractiveness of your property to potential tenants
• Collection of rent
• Communicating information to tenants and acting as an intermediary if the tenant has a request, or in the event of a dispute

Just because you pay a property manager to manage your rental property does not mean that they will necessarily do a good job. We recommend that you speak to a few options and find out how experienced they are, how many tenants they look after (a busy property manager may be too preoccupied to respond to your requests promptly), and possibly even request references.

You can save money by managing these things yourself, thereby being in full control over your property.

We are experienced property investors

Are you actively managing your property portfolio? Don’t let complacency get in the way of your financial goals.

• How do you maximise property value?

• Buy-and-hold: The most passive approach to property investing. As the name suggests, you would buy a property, perhaps rent it out to a tenant, but primarily aim to ride out the property market over a lengthy period of time (perhaps a few decades!).

This strategy assumes that your property is situated in an area of steady capital growth. Whilst there may be peaks and troughs to market activity, you don’t expect this to affect you, as you’re just going to ride out the market.

Effective with houses because the land component is most likely to appreciate compared to the building (general wear and tear is enough to diminish its value, and after a certain point, you may want to renovate).

• Renovation: An older, well-maintained property can deliver strong value. Renovating specific rooms can boost the property’s image and make it easier to market to potential buyers.

Examples of areas where it may make sense to renovate include the kitchen and bathrooms, tidying up the externals (which would help make a good first impression), or repainting and replacing old carpet. 

Some property investors even make a living out of “flipping”, buying properties that need a makeover and selling them in their renovated forms.

• Property development / knock down and rebuild: With land in metropolitan areas becoming increasingly scarce, you can still build a brand new property in a blue-chip suburb through a knock down and rebuild.

However, before you go out and make a property purchase with that in mind, you should take a look through council restrictions that may ruin your plans. For example, some heritage listed properties permit you to perform a rebuild as long as you retain the facade, whereas others only permit you to renovate the interior.

It’s also useful to speak to:

• A couple of different builders to obtain their professional opinion and understand what the ballpark build costs might be
• Chat to a mortgage broker to understand whether, based on the expected purchase price and build costs, you are able to take out a mortgage and construction loan.
• Secure good, long-term tenants: Do not underestimate the power of a good tenant. If you can lock them in for longer periods of time, they offer stable cash flow, help you to look after your property, minimise vacancy, and can be more appealing to other potential investors if you can demonstrate that the property has a long-term tenant.

Whilst you might be tempted to revise rent upwards, remember that changing tenants costs money to you, both through search costs (e.g. advertising and listing fees, paying a real estate agent) and through vacancy. Combined with the ageing of your property, it may be worthwhile keeping the tenant happy by allowing them to negotiate a reduced rental increase, or by waiving the rental increase entirely.

• The impact of cross-collateralisation on your portfolio

Cross-collateralisation refers to the use of more than one property as security for one or more mortgages. It is useful in enabling you to access finance that you otherwise would not have been able to afford, but it is important to understand both the risks and rewards in order to make an informed decision.

The opposite of cross-collateralisation is having a standalone home loan, where for each home loan, one property is used as security.

Here are a few scenarios that present instances where it could be beneficial to cross-collateralise:

• If you have paid off a considerable amount on the mortgage for one property, there is a level of equity in there that you could unlock and apply towards acquiring an additional property. This could also help you to avoid LMI costs
• Debt consolidation could be enabled through bundling up your mortgages and reducing the number of loan facilities you hold. Cross-collateralisation typically requires you to go with one lender only.
• If the value of loans you hold with one particular lender is high, you may be able to use this volume to negotiate more favourable rates.

What are the risks of cross-collateralisation?

• This strategy may backfire if you default. In this case, the multiple properties you have provided as collateral are now in danger of being repossessed by the banks to repay the loan. (In practice it’s a little more complex)
• Refinancing may be difficult due to the complexity of having multiple properties. Furthermore, all properties listed as collateral need to be revalued, which can cause administrative delays.
• If you decide to sell a property that is part of a cross-collateralisation structure, the bank may require you to use part of the profits to pay down a portion of your debt.
• If any of the properties listed as collateral drop in value (e.g. due to a market downturn), it can impact your LVR and restrict your ability to refinance.

We have in-depth experience with structuring complex loans. Speak to us if you’re unsure whether cross-collateralisation is right for you.

• If given a choice between interest-only and principal and interest (P&I), which should I choose?

Whether you go interest-only or P&I is highly situational and depends on your needs.

Interest-only is beneficial if:

• The property will appreciate in value and you intend to sell it to benefit from this increase in value.
• You want to minimise monthly payments (i.e. not have to pay for the principal component) in order to divert the cash elsewhere.
• Your preference is to make use of negative gearing and the tax-deductibility of interest payments in order to minimise your tax payable.

On the other hand, P&I is great if:

• Interest rates are low and you want to make use of them to repay your loan faster (with the goal of having unencumbered ownership). With the benefits of compounding, repaying more of your principal earlier on in the life of a loan saves you interest down the track.
• The loan facility enables you to draw down on the equity that you have accumulated as a result of principal contributions. In effect, this represents savings (not just interest saved due to a reducing loan balance, but forced contributions to equity).