The Essential Guide to Buying an Investment Property in Australia

An investment property is one of Australia’s most popular ways to generate wealth. But what makes it the “go-to” for investors? And how can you do it successfully? This guide covers everything you need to know to get started – from understanding an investment property to choosing suitable financing options, handling tax considerations, and managing the property. Whether you’re just starting out or looking to expand your portfolio, it’s the perfect resource to navigate the Aussie property investment market.

Can you get an expert to structure your finances for an investment property purchase? Check out our list of the best mortgage brokers below.

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

The Basics of Investment Properties

Before we move on to the “how,” let’s examine the “what” and “why” behind Australia’s obsession with property investment.

What is an Investment Property?

An investment property is real estate you buy to generate income or make a profit. Unlike an owner-occupied home, which is the first type of property you buy to live in, you purchase an investment property to make money. This money is made through rental income, capital growth, or a combination of the two.

Why Do So Many Australians Invest in Property?

Research suggests that Aussies spend twice as much time researching property every week than they spend at the gym. So, what makes real estate such a popular investment? It’s due to several factors:

• Property is a physical asset that’s easier to understand than things like shares and cryptocurrency.
• Australia has favourable tax laws that allow investors to enjoy potential tax savings using strategies like negative gearing.
• Property has a solid track record of growth in Australia, rising by 5.4% per year on average since July 1992
• Real estate is considered an effective hedge against inflation because property values and rents usually increase with the cost of living.

Should You Invest in Property? The Benefits and Risks

Like with any investment, you need to weigh the pros and cons before deciding whether real estate is right for you. Let’s examine the benefits and risks of property investing.

Benefits of Property Investment

1. Capital Growth: Property values in Australia have a history of increasing over time, particularly in areas with good infrastructure and strong demand. This rise in value helps build equity, which you can leverage for future investments or other financial goals.
2. Rental Income: Investing in rental properties can provide a steady income stream to help cover your mortgage repayments and other expenses. This extra cash flow can also be reinvested to boost your savings.
3. Tax Deductions: The tax system in Australia is quite friendly to property investors. You can claim deductions on interest payments, property management fees, repairs, and even depreciation on the building itself. A knowledgeable accountant can help you take advantage of these benefits and reduce your taxable income. If you want an accountant with expertise in property investment, check out our shortlists in Sydney, Melbourne and Brisbane.
4. Diversification: Property adds another layer of protection to your investment portfolio. By including real estate, you’re not putting all your eggs in one basket, which can help offset risks if your other assets decrease in value.

Risks of Property Investment

1. Market Volatility: While long-term trends tend to show growth, there’s always the chance of a downturn or slow market. If this drop coincides with your selling, you might lose money instead of making a profit.
2. Vacancy Risks: There’s always the possibility of having an empty property between tenants, which can hurt your cash flow. High vacancy rates or a lack of demand for rentals in your area can make it hard to cover your costs.
3. Interest Rates: If interest rates rise (as in recent years), your mortgage repayments might increase, especially if you have an interest-only loan. This can put extra pressure on your budget and affect your overall returns.
4. Ongoing Costs: After your initial property purchase, you will have ongoing expenses like maintenance, insurance, and property management. These fees can add up quickly, so you need an airtight budget.

How to Get Started with Property Investment

Ready to dive into property investment? There are two things you need to consider before you get started.

1. Determine Your Goals and Investment Strategy

First up, think about what you want to achieve with your investment. Are you hoping the property’s value will increase, or do you want a steady stream of rental income to help with your cash flow? Some investors go for the long game, only buying property in areas they expect will grow in value. Others focus on properties that bring in more rental income than they cost to hold. Knowing what you’re aiming for helps you narrow your options and choose a strategy that fits your goals.

Pro tip: Ensure your property investment strategy aligns with your financial goals. If your wealth is mostly in stocks, you could focus on rental income to diversify cash flow. But if you already have a stable income, consider properties in high-growth areas for capital gains.

1. Set a Budget and Financial Plan

After you’ve developed a strategy, you need to determine how much you can afford to invest. A solid budget will help you avoid overstretching your finances and give you peace of mind.

Here are a few tips for creating your budget:

• Check your borrowing power by getting pre-approval for a loan
• Factor in upfront costs such as the purchase price, stamp duty and legal fees
• Plan for ongoing expenses like insurance, maintenance, and property management fees
• Keep a buffer for unexpected costs like urgent repairs or rising interest rates
• Consider the impact of potential changes in your personal situation, like starting a family or changing jobs
• Review your budget regularly and adjust it as your situation changes.

Financing an Investment Property

Unless you have a small fortune hidden under your mattress, you must obtain finance to purchase an investment property. Let’s look at the main types of loans and the best way to get approved.

Mortgage Options for Investment Properties

The two most common loan types for property investors are: 

1. Principal-and-Interest Loan

With this type of loan, you’re simultaneously paying off the amount you borrowed (the principal) and the interest. It’s a great option to build equity faster and reduce debt over time. The monthly repayments are higher, but you’re chipping away at the loan balance from day one. This can be a good fit if you plan to hold onto the property long-term and want to increase your ownership stake sooner rather than later.

1. Interest-Only Loan

An interest-only loan is a favourite among investors looking to maximise cash flow, at least in the short term. You only pay the interest for a set period (typically 3-5 years), keeping your monthly payments lower and potentially increasing your tax deductions. However, once the interest-only period ends, your repayments will increase as you start paying off the principal. This type of loan can be helpful if you’re looking to free up cash for other investments or expenses – but be prepared for the higher payments down the track.

Should You Hire a Mortgage Broker?

Working with a mortgage broker can be smart, especially if you’re new to property investment. A broker does the heavy lifting for you regarding obtaining finance. They compare loans from various lenders and find the best fit. Because they work closely with lenders, mortgage brokers can often access better rates and exclusive deals you couldn’t get on your own. Plus, they’ll guide you through the entire application process, making it easier to get approved. 

If you’d like access to chat with a mortgage broker near you, we’ve got a shortlist of recommended options in Sydney, Melbourne and Brisbane.

Choosing the Right Property and Location

Once you’ve got your finances sorted, it’s time for the exciting part – finding an investment property to buy. Here are some tips to pick the right one.

Research Property Markets and Suburbs

Property markets across Australia can be wildly different, so it’s essential to dig into the details before you buy. Look at local property prices, rental yields, and vacancy rates to understand an area’s potential. 

Pay attention to factors like population growth, job opportunities, and upcoming infrastructure projects – these can all boost demand. Tools like CoreLogic and RP Data can give you insights into historical trends and rental returns so you have all the necessary information to make an intelligent choice.

Evaluate Property Types for Investment

Not all properties are created equal when it comes to investment potential. Consider who your future tenants might be and what they might need. 

Houses often have higher maintenance costs but can command higher rents, especially in suburbs popular with families. On the other hand, apartments are cheaper to maintain but may offer less potential for capital growth. Property investment is choosing the right option based on your initial plan and goals.

Use a Buyer’s Agent to Find an Investment Property

Hiring a buyer’s agent can be a game-changer if you’re overwhelmed or want expert help. Buyer’s agents know the market inside out and can help you find properties with solid capital growth potential. They’ll handle the research, shortlist properties, and even negotiate the deal for you. It’s like having a property investment partner focused on getting you the best result without the hassle of doing it all yourself. 

Just make sure to choose an agent experienced with investment properties so they understand your needs as an investor (if you still need to learn one, we can recommend a buyer’s agent in Sydney, Melbourne and Brisbane).

Legal and Tax Considerations to Keep in Mind

Investing in property isn’t just about picking the right place – you also need to understand the legal and tax side of things. Here’s what you should know before signing on the dotted line.

Legal Essentials of Owning an Investment Property

Owning an investment property comes with many legal responsibilities, especially regarding tenant rights and property compliance. You’ll need to know tenancy laws covering everything from rental agreements to bond returns and eviction rules. 

It’s also crucial to have proper conveyancing done to make sure the sale process is legally sound. A property lawyer can help you navigate contracts, ensure you meet all legal requirements, and give you peace of mind that your interests are protected. If you’re looking for a reliable conveyancer in your area, check out our recommendations for Sydney, Melbourne, and Brisbane.

Tax Implications and Deductions for Investment Properties

Property investment can come with significant tax benefits, but knowing what you can and can’t claim is essential. The Australian Taxation Office (ATO) lets you deduct expenses against property value, like interest on your loan, maintenance and repairs, property management fees, and even depreciation on the building.

If your property is negatively geared (meaning your expenses are higher than your rental income), you can offset those losses against your other income. Remember that when you sell the property, you’ll have to pay capital gains tax (CGT), too – so it’s worth planning ahead to avoid any nasty surprises.

Property Management and Tenant Relationships

Managing an investment property isn’t just about the property managers collecting rent – it involves handling tenant issues and maintaining the property. Whether you do it yourself or hire a property manager, here’s what you must remember.

Understanding Your Responsibilities as a Landlord

As a landlord, you’re responsible for providing tenants a safe living place. This means taking care of regular maintenance, handling repairs quickly, and ensuring the property complies with safety regulations. You’ll also need to follow tenancy laws, which cover everything from rental agreements and rent increases to bond refunds and eviction procedures. Keeping good records of all interactions, payments, and repairs is essential – it protects you and your tenants if there’s a dispute.

Building Strong Tenant Relationships

A positive relationship with your tenants can make your life much easier. Happy tenants are more likely to pay rent on time, take care of the property, and stick around longer, reducing the risk of vacancies. Be responsive, address any issues quickly, and clearly communicate your expectations. Simple gestures, like being flexible with minor requests, can go a long way in building a solid relationship. You could even go the extra mile and send them a Christmas or Happy Holidays card in December.

Is Hiring a Property Manager Worth It?

Hiring a property manager costs money, but it saves a lot of time and stress. A good property manager handles everything – finding and screening tenants, collecting rent, organising repairs, and dealing with disputes. They’ll also ensure you comply with local laws and regulations, giving you peace of mind that everything is above board. Many investors find it well worth the 5-10% fee for the convenience and expertise they bring. If you’re new to property investment or have multiple properties.

How to Maximise Your Investment Property’s Value

The point of an investment property is to make a profit – but not everyone does. You need to look at different ways to maximise your property’s appeal so you can put more money in your pocket.

Make Upgrades That Add Value

Consider updating critical areas like the kitchen or bathroom – they’re big selling points for renters. A fresh, modern look can help attract more qualified tenants and allow you to charge higher rent. Even small changes like a new coat of paint, updated light fixtures, or new flooring can make a big difference in how the place looks and feels.

Stay on Top of Maintenance

Maintaining your property goes beyond making repairs when issues pop up. Regular maintenance, like servicing the air conditioning or checking the plumbing, prevents minor issues from snowballing into costly repairs. Plus, a well-maintained property is way more attractive to tenants, which means less vacancy and more rent in your bank account.

Think About Refinancing or Revaluing

If your property’s value has increased, refinancing could help you get a better interest rate or free up some cash. Revaluing the property can also give you access to extra funds, which you can use for renovations or even put towards your next investment property. It’s a great way to keep growing your portfolio without digging into your savings.

Alternatives to Direct Investment in Property

Is buying a rental property right for you? There are a few other ways to enter the real estate market without taking on the full responsibility of being a landlord.

Real Estate Investment Trusts (REITs)

REITs are a fantastic option if you want to invest in property without the hassle of managing it yourself. They work like a share in a portfolio of properties – you invest your money and earn income from rent or property sales, all without dealing with tenants or maintenance. REITs are easy to buy and sell (like stocks), and the entry costs are usually lower. Remember, you won’t have as much control over the properties being invested in.

Property Syndicates and Crowdfunding

With property syndicates or crowdfunding, you join forces with other investors to pool funds and buy into a property. It’s a way to get a slice of the real estate market without paying the total purchase price yourself. But since you’re sharing ownership, profits are split, and decisions are made collectively. This can sometimes complicate things. It’s a hands-off approach, but it does mean giving up some control.

Conclusion: Is an Investment Property Right for You?

Buying an investment property can be a fantastic way to build wealth. It offers a mix of potential capital growth, rental income, and tax perks. But it’s not a get-rich-quick scheme, and success isn’t guaranteed, so you must open your eyes. Getting advice from professionals can help you create a strategy that fits your investment goals and risk tolerance. Proper planning and a long-term outlook make the property a fantastic investment.

Speak with an expert mortgage broker in your area:

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

FAQs

1. What is the minimum deposit required to buy an investment property?

Most lenders ask for a 20% deposit for home loan on an investment property, but some may accept lower deposits with lender’s mortgage insurance (LMI). The amount depends on your borrowing power, credit history, and the lender’s policies.

2. How does negative gearing work, and what are the benefits?

Negative gearing allows you to deduct the loss on your investment property (when rental income is less than expenses, such as interest on the loan and maintenance costs) from your taxable income. This can reduce your tax liability and make investing more affordable in the short term.

3. Are interest-only loans best for property investors?

Interest-only loans can lower monthly repayments since you’re only paying interest initially, making them popular among investors aiming to maximise cash flow. However, when the interest-only period of an investment loan ends, repayments increase, and less equity is built over time.

4. What expenses can I claim on my investment property as tax deductions?

You can typically claim tax deductions for property expenses like interest on loans, maintenance costs, property management fees, council rates, depreciation, and insurance. To maximise deductions, keeping thorough records and seeking independent professional tax advice is essential.

5. How do I choose the right location for my investment property?

Selecting the right location involves researching the property market, including rental prices, vacancy rates, capital growth potential, and local infrastructure developments. Areas with low vacancy rates, high demand, and future growth prospects are better for investors.

6. What is the difference between positive and negative gearing?

A positively geared property generates more rental income than its expenses, resulting in positive cash flow. On the other hand, negatively geared properties have higher costs than rental income – but many of these expenses can be claimed as deductions, reducing taxable income. The choice between the two depends on your investment strategy and financial goals.

7. How do I handle maintenance and property management?

You can self-manage your property or hire a property manager who handles tenant relations, maintenance, and compliance. While hiring a manager involves fees, it can make your life easier, especially if you manage multiple properties or invest from another state or city.

8. How do capital gains tax (CGT) and other taxes affect my investment?

When you sell a property for a capital gain, the profit is subject to capital gains tax (CGT). However, you may be eligible for a 50% discount if you hold the property for over a year. 

9. What is rental yield, and how is it calculated?

Rental yield is the annual rental income as a percentage of the purchase price or current property value. Gross rental yield is calculated without accounting for expenses, while net yield factors in costs like maintenance, insurance, and property management fees. Check out our article on calculating rental yield for more information.

10. Can I use my home’s equity to purchase a second property as an investment property?

Yes, using equity in your home can increase your borrowing power and help finance a deposit or cover other costs for a new investment property. However, tapping into home equity involves risk, so consider the impact on your house and your financial situation.