How to invest in property, in one guide's five steps
How to invest in property is set out in a step-by-step guide published by a bank as five stages: working out a deposit and borrowing power, choosing a strategy, researching property, picking a loan, and managing the rental after settlement.
That guide starts with getting the financial foundations right first. It suggests speaking with a tax agent and getting current advice that takes personal circumstances into account before making any decisions about investing. The guide offers these five steps to help get a foot on the investment property ladder.
Deposit, equity and borrowing
The deposit can come from savings held in cash or from equity in a home already owned. The guide defines equity as the difference between what a property is worth now and what is still owed on the loan against it. One route uses equity that has built up in a home, which increases the existing loan and adjusts the repayments that go with it.
Most lenders, the guide says, will allow access to up to 80 per cent of a property's value, though this varies between institutions. Deposit plus borrowing power gives a working budget for the search. The guide adds that the deposit is not the only cost to plan for, since owning a rental brings other expenses with it.
Capital growth, yield and location
Two terms recur through the bank guide: capital growth and yield. Capital growth describes how much a property's value rises over time. Yield is what the investment returns, most often as rent. The guide describes high-growth properties as often more expensive and negatively geared, while high-yield ones tend to cost less and be positively geared.
Location forms part of the strategy in the same guide. Properties within reach of transport, healthcare, shops, childcare and similar amenities are typically more in demand, and may cost more at the start while generally drawing higher rents. The guide suggests looking at what comparable properties in an area have sold for and what they rent for, to judge likely rental yield.
An advice page from a property website lists two more words investors meet: land tax and depreciation. It describes land tax as an annual charge on land that someone owns or co-owns once its value passes a threshold. Depreciation on an investment property, it says, can be claimed against taxable income, much as wear and tear on a car bought to produce income can be.
Loans, settlement and managing the rental
Investment loans come in different types, and the guide lists fixed and variable rates, offset accounts, redraw and interest-only periods among the features to consider. One advice page notes that, according to a bank, finance for an investment property is structured differently from a standard home loan.
At settlement, the guide says, the buyer does not collect keys or move in. Instead a property manager is engaged and a tenant found, or an existing lease is taken over. The guide places insurance alongside an experienced property manager as part of running the property from there.
Questions
- How do you invest in property?
- A bank's step-by-step guide sets out five stages: working out a deposit and borrowing power, choosing a strategy, researching property, picking a loan, and managing the rental after settlement. The same guide suggests getting current advice from a tax agent before deciding anything.
- How does investing in property work?
- In the bank guide, the deposit comes from savings or from equity in a home already owned, and most lenders will allow access to up to 80 per cent of a property's value. Deposit plus borrowing power then gives a budget for the search.
- What is the difference between capital growth and rental yield?
- Capital growth is how much a property's value rises over time. Yield is what the investment returns, most often as rent. The guide notes that high-growth properties are often negatively geared, while high-yield ones tend to be positively geared.
- Do you need a property manager for an investment property?
- According to the bank guide, at settlement the buyer does not collect keys or move in. A property manager is engaged and a tenant found, or an existing lease is taken over, with insurance in place.
- What is land tax?
- A property advice page describes land tax as an annual charge on land that someone owns or co-owns once its value passes a threshold. The same page says depreciation on an investment property can be claimed against taxable income.