6 Simple Steps to Purchasing an Investment Property

Purchasing an investment property can be a little overwhelming especially when you don’t even own one. There are so many decisions to make, where to start, what to do, who to talk to, who to trust, where to invest?

But if you take the right steps you can go from owning one property to two, three, four or more properties to help build your wealth and live the life you have always wanted.

Most people are comfortable owning one property but lack the knowledge and know how to purchase their second or third. Not because of lack of money but of the understanding of how banks work, their cash flow position and their fear of leveraging more debt.

We will take you through our 6 simple steps which will help you purchase an investment property and help you build towards owning more. Remember it doesn’t matter if you have little or no equity or money in the bank, everyone is different, so focus on your circumstances not someone else’s.

1. Use your home to purchase an investment property

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That means you may be able to use the equity in your own home to provide your deposit, by accessing your equity.

What is equity?

Equity is the difference between the money you owe on your property and what a lender thinks your property could sell for. If you had a loan balance of $300,000 and you had your property valued at $700,000 then you would have $400,000 of equity and a loan to value ratio of (LVR) of 43%.

From there a lender will use your LVR to figure out how much equity you have and how much you will be able to borrow.

Deposit sizes and the requirements you must meet vary from lender to lender, but generally it is a 10-20% deposit in Australia, 30% deposit in New Zealand for an investment property. Applying for a loan through Power House Financial Services in Australia or The Mortgage Supply Company in New Zealand you will have access to a range of lenders, not just one, so this enables you to find the right loan that fits you and your circumstances.

Realise though, that equity is not free money. When you access your equity, your loan balance will increase and so will your repayments. So, make sure the cash flow of the property is right.

2. Can you afford to purchase an investment property?

Purchasing an investment property

When purchasing an investment property it has a lot of the same ongoing costs as the property you live in, and there are a few ongoing costs such as insurance, land tax, council rates, maintenance, and property management. Any costs you may incur become part of your future taxation deductions for being in business – owning investment properties is a business.

Borrowing power vs buying power

Your borrowing capacity – the amount of money the lender will lend you – is different from what you can spend on your new property. Work out the fees and costs that apply to you, so you know in advance what your repayments will be and how much you can spend on your new property. Take note of setting a budget that works in with your lifestyle as this is where many potential investors get it wrong.

TOP TIP: Just because a bank will lend you say $700,000 doesn’t mean you have to go right to the limit, be conservative and borrow less than what the bank allows.

3. Find the right loan to suit your needs.

Negotiate and save!

Your Mortgage Broker is on your side when it comes to getting a loan that’s right for you.

There are options and product features that come with different loans; offset accounts, redraw facilities, fixed and variable rates and overdrafts. Again, your broker can access investment loan offers for you and negotiate a competitive deal.

Brokers look to save you in interest payments and fees by finding the right loan and repayment structure for you and at times can achieve better rates through their extensive broker channel than you could get at your local branch.

TOP TIP: If you don’t use a mortgage broker and you want to go through your local bank don’t be upset if they don’t approve you for a loan, just head to another bank.  Each bank has their own policies even if you have banked with them for over 20 years this won’t make a difference.

4. Cash flow is king and keeps you going

6 Simple Steps to Purchasing an investment property with Key to Australia

Negative gearing

Negative gearing is a way of minimising your taxable income. Property investment with negative cash flow means the expenses you’re paying on the property are greater than the income you get from the property.

However, if you’re making a loss on your investment property, then you’re losing money, so you’ll need to make sure you have other income to fund your expenses.

Positive or neutral gearing

With current interest rates remaining historically low, more investment properties are positive or neutral cash flow, which means, at the end of the day the tenant pays rent which covers interest payments on the loan, plus outgoing costs – and in a cash flow positive property you may well receive money in your pocket as well!

Selling your investment

If you are purchasing an investment property to hold and not to renovate and sell, then you are likely to keep it for at least 10+ years.  However, if circumstances were to change and you decide to sell your property for a profit, the Australian Tax Office collects on the capital gain.

In New Zealand, if you sell within 5 years you must pay capital gains tax under the new 5-year bright line test. Plus, if you sell within 10 years you still must show that you intended to hold the property for the long term, but you are now selling because of new circumstances.  At this time, there is no capital gains tax after 10 years if you sell your property in New Zealand.

5. Choose the right area when purchasing an investment property

6 Simple Steps to Purchasing an investment property with Key to Australia

As a property investor, the dream is a high yielding property in a location with big capital gains, strong rental returns, and low maintenance costs.

So, buying land and building a new investment property begins to make a lot of sense if done properly through the right people.

Don’t be afraid to invest in a different state or city other than the one you live in.  Especially if you are priced out of your own.

Do your research

Either find someone to help you with your research or do it yourself.  This research can take months especially if you are new to property investing or don’t know a particular area. Beware don’t just go on someone’s advice, speculation or ideas, take that information and look into it yourself, study the information and then make a sound decision.   

Choosing the right area is crucial to the success of your investment property.  There is no point buying in any area, it needs to be the right area.

6. Securing a tenant

6 Simple Steps to Purchasing an investment property with Key to Australia

Now you have purchased your investment property, it’s time to find a great tenant. There are two options, either do it yourself or hire a professional management company. This is really a personal decision based on your experience and expertise, don’t make this decision based purely on what it costs for a property manager, it’s a business decision.

But if the property is not close by or in another state or city, we would highly recommend having the property managed, because if something does happen and needs urgent attention it can be dealt with straight away. Nothing worse than having to leave work or a holiday to deal with a leak or a damaged property.

Remember, treat your tenant with respect, and dignity by giving them a warm, dry and secure home they can feel safe in and that they treat it as if it was their own.

Rewards pay off

Purchasing an investment property and maintaining it can be a lot of work but it will give you massive rewards if done right. Property investing will help you live the life you have always wanted and will help you retire well, without having to live just on the pension or super.

If you would like to speak with us about your wealth creation or retirement plans, contact us today for a free consultation. We have been helping everyday people reach their wealth goals for 35 years, we have the reputation, service and expertise to build towards the future you want.

About the Author

CEO of Key to Australia. I've been mentoring and helping people purchase property (home or investment) for over 35 years in Australia. I was born in New Zealand and love helping people achieve financial success through property.

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