6 smart investment property strategies 

 

What you’ll learn

• How to get clear on your investment goals
• The importance of a detailed financial plan
• How to use your equity to buy an investment property
• Making the most of your tax benefits
• Negative and positive gearing
• Buy and hold and/or exit strategies

 

1. Get clear on your investment goals

Investing in property has long been a popular route for Aussies trying to build wealth. Australian’s trust property investing because of its potential for capital growth and returns, and as a way to diversify their investment portfolio. 
 

But before jumping into the property market, it’s essential to map out your investment goals. Are you looking for long-term appreciation, immediate rental income returns, or a combination of both? Understanding your objectives at the get-go will help guide your property selection and overall strategy.

 

2. Create a detailed financial plan

It’s important to know what you’re going to be up for financially before you buy. Factor in all the costs in a budget for your investment property. 

This should include the:

• Purchase price
• Renovation costs
• Property taxes and duties
• Insurance
• Council rates, utilities and strata costs
• Potential maintenance expenses
• Saving for any unforeseen circumstances – such as gaps between rental income.

Look for the best property loan interest rates, and the most favourable loan terms, so you pay less for your investment.

3. Use your equity for a deposit

If you already own a home, then you may be able to use the equity you have to buy your first investment property. Equity is the difference between the value of your property and how much you owe on your mortgage. 

 

So, if your investment property loan is for $500,000 and your house is valued at $900,000, then you have equity of $400,000 that you can potentially use as a deposit. 

 

Lenders usually allow you to borrow up to 80% of the equity value. So, in this example of that $400,000, there may be a usable equity of $220K. A bigger percentage of usable equity may be allowed but there will likely be Lenders Mortgage Insurance (LMI) and higher interest rates. 

 

With this strategy, you may be able to go on to buy your next investment property with the usable equity you have in both properties. This can be repeated over time to build a property portfolio.

 

Using equity is a common way to get the funds to buy a first and subsequent properties. But it’s important to make sure that you have enough equity left over to help if you hit a financial curve ball. Or to prevent you being over extended, for example if interest rates go up and your mortgage repayments begin to outstrip your income. 

Find out more about using your equity to invest in property in our in-depth article.

 

You can still buy an investment property as a first-time buyer. You’ll just need a deposit and be able to meet the lending requirements for the loan.

 

4. Make the most of your tax benefits through depreciation

Often the goal with an investment property is to generate financial returns – usually through rental income as well as capital gains. Because of this, it’s usually classed as a taxable asset.

Making tax deductions based on depreciation, to account for the natural wear and tear on the assets, can offset your taxable income from your property and may reduce the amount of tax you have to pay.
 

It’s essential to understand the tax implications of your investment. Talk to your accountant or tax adviser about how to take advantage of available deductions, depreciation benefits and other tax incentives. Proper tax planning can significantly impact your overall return on investment. For more info, check out our guide to property depreciation for investment property.

5. Negative and positive gearing 

Gearing means that you’ve used a home loan to buy your investment property and it can be negatively or positively geared.
 

Negative gearing is where the amount of rent you get from your tenants (the rental return) for your investment property, is less than your interest repayments and other expenses that are property related. Owners may deduct this loss against other income they have, such as salary and wages, which can lead to tax savings. It’s important to talk to your accountant or financial adviser about your best options, given your financial circumstances.

 

Positive gearing is where the amount of rent you get from your tenants (the rental return) is higher than your interest repayments and all other expenses that are property related. These surplus funds can mean a passive income and positive cash flow. Making a profit in this way may have tax implications, so again talk to your accountant or tax adviser about the impacts.

Find out more about negative and positive gearing and rental yields in our buying an investment property beginner’s guide.

 

If you’re buying property hoping its value will go up over time, that’s called investing for capital gains. Capital gains is the money you make when you sell a property, which is the sale price minus what your originally paid and any costs you had to sell it. In Australia you usually have to pay tax on the profit you make when selling assets, like property. If you’re investing in properties to rent out or sell later, you’ll likely have to pay Capital Gains tax on any profits you make.  

 

6. Buy and hold or exit strategy

Like all investments it’s important to have an exit strategy for your investment property. Most property investors use a buy and hold strategy where they hold onto the property for as long as possible so that they make the most out of the property going up in value over time. This is a tried-and-true strategy. But there are good reasons to sell an investment property, including real estate having reached a peak in the market, or the ongoing costs of maintenance.

 

Consider how long you may want to hold onto it for and what the triggers might be for you to sell it. Before you buy, talk to your accountant or tax adviser about different exit strategies that are appropriate for your situation.

 

A successful investment property strategy involves a combination of research and planning before taking the leap. Let us help you buy an investment property with confidence. Talk to one of our lending specialists about your lending options.

 

Get in touch 

We’re here to help – we can talk to you about how your home loan payments are comprised, interest rates, refinancing, and how much you might be able to borrow for your next house. Speak to someone today.