Have you considered tapping into your current home’s equity, in order to buy an investment property?
You’re not alone! This is a popular way to build wealth and with good reason: it makes your most valuable asset work even harder for you.
But making the leap from homeowner to landlord can seem daunting. So we’ve put together a step-by-step list of things to consider when you’re starting out on your investment journey.
1. Talk to a professional
A good mortgage broker is your best friend when you’re starting out. They’ll help you understand how much you can borrow and the types of loans available. It’s a lot more detailed than simply plugging your numbers into a home loan calculator! And your broker can answer a whole range of questions, because they’ve done it all before for hundreds, if not thousands, of clients, using many different lenders.
2. Know your equity
Your broker will help you organise a valuation of your current property to assess the equity you can access. For instance, if the house is worth $750,000 and you owe $500,000, then you have $250,000 equity. This will impact your borrowing power and whether you need to pay Lenders Mortgage Insurance, which is required if you have less than a 20% deposit.
3. Clarify your goals
Some properties are more geared towards capital growth – meaning it increases in value over time. Others are better for providing income through rent. Your life stage will dictate what’s best for you. Generally, those saving for future wealth prefer capital growth, while retirees or those who aren’t working will need the income. Decide what you need, as this will dictate the type of property you buy.
4. Consider how much you can afford month-to-month
‘Serviceability’ is all about how much you can afford to allocate to repaying the loan each month. Rental income will be considered by your lender, but it varies between different providers. Some will allow 75% of the repayments to be covered by rental income, others up to 80%.
The lender will then need to be satisfied that your income can cover the remainder of the repayments. Remember, there could be costs other than the loan, such as strata fees, council rates or repairs, and you need a buffer for these.
5. Decide on the right structure
Owning a property in your name is only one option. Depending on your situation, there may be benefits to owning through a different structure, such as company, trust or SMSF. Each one will have its pros and cons, and its own tax implications. An accountant can advise you on this.
6. Gather your ‘A-Team’ advisers
A broker is a great person to start with, but you’ll also benefit from working with:
- an accountant, to advise on tax and structure;
- local real estate agents, to provide insights on the market
- a depreciation specialist, to assess what losses you can claim for tax
- a conveyancer, to manage the legal affairs and contracts
- a building inspector, to make sure you don’t buy a dud!
7. Think like a business person!
Buying your own home is an emotional decision – do you like the fittings, the local school, the layout? But an investment is different: it’s all about demand for rentals, price versus income, ongoing costs and a range of other factors. Focus on the hard numbers, not whether you like the garden or enjoy the café next door!
8. Protect your investment
Ensure you have the right insurance in place for the property including Landlord Insurance, in case of damage by tenants. You may also consider protecting your ability to pay off the loan, with a product like Loan Protect, or better yet, income protection from a YBR financial planner, to protect your income if you are unable to work in the future due to sickness or injury.
Property investment can be a great way to build wealth, but success relies on careful planning and preparation. Working with experts is crucial, and your local YBR branch can help you get started on this exciting journey.