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So, you’re thinking about buying an investment property. While you’ve probably been told before that investing in property is a smart way to generate a passive stream of income and boost your wealth, it’s a decision that requires expert advice and a big injection of your time, energy and money.
The truth is that purchasing an investment property comes with a totally different set of criteria compared to securing a home. Instead of looking for your “dream home”, you want to be on the hunt for a sound investment that will offer low vacancy rates, high appeal to tenants and the potential for capital growth over the long-term.
We've noticed a lot of property investing guides out there don't actually give you the full picture. They might give you a few tips for investing in property, or tell you what to look for before buying, but they won't actually prepare you to go out there and invest in real estate.
That's why we set out to write this comprehensive guide. We want to empower you with all the tools and knowledge you need, from deciding if investing in property is right for you, the tangible steps you need to take to buy an investment property, all the way to selling it to make gains.
By the time you've finished reading this guide, you'll have the mindset of a property investor, and you'll know everything you need for buying an investment property.
Chapter 1. Finding out if investing in property is right for you
If you’re looking to get your foot in the investing door, real estate is likely on your mind. And it makes sense: right now, property prices are skyrocketing across the country (and don’t look to be slowing down any time soon).
Lots of growth suburbs in Australia are showing year-on-year increases of 20% and even 30% in their price.
Property has a proven track record of delivering solid returns, but it’s important to weigh up all your options before buying an investment property. Depending on your investment goals, other options such as stocks might make more sense for you.
Before you join the ranks of over 2 million other Australian investors with a rental property under their belt, let’s dive into the risks, costs and rewards of investing in real estate (and what other choices you could consider, too).
Keep in mind that this is not financial advice, as we can't account for your individual requirements and financial circumstances. You should speak to a licenced expert to get advice on the right investment option for you.
Should you invest in real estate?
There's a reason why banks are so lenient with home loans these days. Property is an incredibly safe investment to make, and you can expect to get significant returns as long as you have patience.
- Tax benefits: Owning an investment property comes with tax benefits. If you have a negatively geared property, you can expect even more property tax deductions (more on this in part 3).
- Capital growth: There’s a strong chance of capital growth in the Australian property market, as long as you’re patient enough to wait for your rental to rise in value.
- Retire early: Especially if you build a successful property portfolio, it’s possible to grow a generous monthly income to live off by investing in property.
- You can hire a property manager to take the hassle out of it: They'll be able to do the hands-on stuff like securing tenants and chasing rent payments, to make this a set-and-forget investment.
- Passive income: If you positively gear your property, you’ll be able to score a regular stream of extra income (without lifting a finger).
- Leveraging your equity: It’s also possible to grow your investment property portfolio in a low-cost way by using the equity in your first rental property to reduce the cost of your next loan.
- You can increase its worth: By investing in savvy improvements, you can boost the earning potential and value of your rental property.
Get a better understanding of why property is such a good investment
Get more detail about the 7 reasons to invest in property, as well as useful resources by reading our article "Real Estate vs. Stocks"
Is investing in real estate better than investing in the stock market?
While real estate is a tried-and-tested investment option, it isn’t your only choice.
Stocks are the most common investment options people compare. And it makes sense, you’re wanting to get the best bang for your buck and justify making a (potentially) high-risk investment.
A good thing to look at is the historical returns of real estate vs stocks.
So, let’s break down the real estate vs stock market for you.
Real estate vs stock market returns comparison
Capital growth: Chances are that your property will increase tremendously in value over time. You can also make contributions yourself to the value of a property, through renovations and upgrades.
Passive income: Collecting rent from tenants gives you an additional source of income.
Dividends: If the company is doing well, some will pay shareholders a small amount per share they own each quarter.
Selling: If you hold onto your shares over the long term you may make a big profit when you sell. Albeit, risk follows.
Vacancies: Finding tenants can be tricky and may take longer than you might expect!
Liquidity: Real estate isn't easy to turn into cash quickly. You have to invest a lot, and you won't see that money for some time.
Volatility: Shifts in the wider economy have a huge impact on stock values, which can make it a higher risk investment than property.
No guarantee of return: You're subject to the performance of the company you invest in. So, you're less in charge so to say.
All-in: Buying an investment property doesn't come with much flexibility. You have to buy and sell the entire property in one go, so it's an all-in, all-out kind of investment.
At will: You can sell some of your shares or all of your shares as you see fit.
Very high: You'll need a big stack of cash to buy an investment property (20% of the total price).
Medium: You can invest as much as you want, whether it's $1 or $10,000, but you should invest significant amounts if you want to make actual gains.
Get our in-depth breakdown of property vs stocks
Click the link below if you want more information about the pros and cons of property compared to stocks, and which one you should pick.
When is the right time to buy an investment property?
It’s the question on all investors’ minds: is now a good time to buy property?
The truth is the best investors make their next move when they feel comfortable and well-prepared financially. In fact, many experts believe that time in the market is more important than timing the market.
There's no one-size-fits-all answer to whether or not now is a good time to buy real estate, but here are a few key things to sort out before buying an investment property:
- Understand your borrowing power and have your pre-approval in place.
- Get your personal finances sorted: understand your monthly income and expenses and pay down your debts (that includes cancelling credit cards you don’t use).
- Create a savings buffer so you don’t pour all your spare cash into your deposit.
If you’ve ticked all these boxes, now could be a good time for you to consider investing in your first (or next) property.
Use our checklist to see if now is the right time for you to buy
We've interview Helen Collier-Kogtevs, founder of Real Wealth Australia, who explains exactly why timing the market is considered a better approach, and the signs to look for that indicate if you should jump into the real estate market.
Costs of buying an investment property
It’s no secret that getting into the property market doesn’t come cheap. So, what investment property costs do you need to factor into your budget?
1. Upfront costs of investing in property
Based on a property worth roughly $1 million in NSW, the upfront costs of buying an investment property would be:
- Valuation fee: $300
- Stamp duty: $42,000
- Legal fees: $100
- Lenders mortgage insurance: $20,000
- Loan fee: $700
2. Ongoing costs of investing in property
- Mortgage repayments (approx. $3845/month, borrowing 80% on a $1million property at 3.1% interest)
- Electricity: $1627 p.a.
- Water: $984 p.a.
- Gas: $904 p.a.
- Home insurance: $1117
- Council rates: $708
- Maintenance: Using the 1% rule, operating costs should equal 1% of your property’s value each year.
- Property manager: 5%-11% of your weekly rent or a few hundred dollars at a flat property management fee.
Read our case study on investment property costs
In our in-depth article, we run you through a hypothetical investment and how much it costs. You'll also get all the government websites and resources you need to understand the costs of buying.
Risks of investing in property
The truth is that investing in property is not by any means fail-safe. Some risks include:
- If you can't secure a tenant you'll bleed money.
- Dips in the property market can and have happened.
- Trends and preferences among renters and buyers constantly change, meaning your house might fall out of favour.
- You have to put down a significant deposit to secure a property, which could be financially harmful to you.
- There's no actual guarantee of making a return (though, it's likely as long as you hold it for 7-10 years or longer).
The truth is that real estate can be a high-risk investment. If you fall into the trap of making a costly mistake as an investor and don’t conduct a real estate risk analysis, you could end up losing out.
But there are practical steps you can take to lower the risk of investing in property:
- Secure funding first: get your pre-approval in place before you make an offer.
- Factor in rate rises: make sure you can afford your repayments if rates did go up.
- Take the emotion out of it: be sure to look objectively at the risks and expected returns.
- Get the right structures in place: figure out the implications of different loan structures as well as which lender will offer you the best rate.
Keep everything we’ve talked about so far in mind before you dive into your investing journey. Still with us? Great! Next, let’s get you into the mindset of a property investor.
Full-service property management for $100/month
See what's included in our flat and fair property management fees.
Chapter 2. Getting in the mindset of a property investor
Once you’ve nailed the question of 'should I buy an investment property', it’s time to turn your attention to your mindset as an investor.
Becoming a successful property investor is about more than just having the cash ready to secure a rental. What sets the best investors apart from the pack is having a clear understanding of how to approach your investment property like a business.
Your philosophy when buying an investment property should be very different to when you're buying a home to live in. It'll be less about whether you like the colour on the walls, and more about the rental yield in the area, projected growth and so on.
In this chapter, you'll also learn about the common real estate investing mistakes you should avoid, and some things to consider when buying a rental property.
What you need to know before buying an investment property
Before you take the plunge into real estate, it’s worth listening to experts and people you know for property investment advice.
- How will you finance your property? Are you happy to weather out month-on-month losses in the hopes of making a capital gain (a.k.a. negative gearing)? Perhaps you’re looking for stable returns and a regular source of income (a.k.a. positive gearing)?
- Where are you looking to buy? Make sure to consider what areas will be attractive to potential tenants as well as whether regional or urban areas will offer you consistent rental income, low vacancy rates and the potential for capital growth.
- What type of property are you looking to buy? Whether you’re purchasing a brand-new apartment or an established family home, each comes with a unique set of costs and challenges to consider (as well as the potential for things like tax savings and solid rental returns).
- Understand what to look for in an investment property: Things like a property’s room size, parking spaces and amount of storage all impact how much you can earn from your rental property.
- Can you cover all the costs involved in buying an investment property? From valuation fees to Lenders Mortgage Insurance, make sure to do the math and figure out how much you can feasibly afford to invest in real estate.
- How much can you borrow? While it’s possible to borrow up to 95% of a property’s value, strict eligibility criteria will apply. Before you start your investment property search, it’s a smart move to get pre-approved for a loan so you know how much you can actually afford to borrow.
- Should you get a property manager? If you’re looking to save time, find tenants quickly, and get someone else to manage things like rent payments and maintenance, a property manager can be an easy way to take work off your plate.
- Are you prepared for the unexpected? If a nasty repair crops up, do you have the financial wiggle room to cover these costs at short notice?
- Do you know your legal obligations? It’s important to get your head around the landlord-tenant laws (and stay on top of them as they change).
Make sure you've thought about all the important aspects of investing in property
We've broken down what you need to check, decide and be aware of so you can pick a good investment property with confidence.
Common real estate investing mistakes you need to avoid
Learning from successful property experts is wise, but common mistakes are also a great source of learning.
Let's look at some common mistakes property investors make so you can avoid them:
- Investing with your heart, rather than your head: The most successful investors take emotion out of their investment property purchases to find rentals that will deliver the best capital growth and rental yield.
- Skimping on the research: Avoid a dud investment property by understanding the pros and cons of buying old or new, the condition of the property plus the top features tenants want in a rental.
- Cutting out the experts: Investing in a professional second opinion from an accountant, mortgage broker and property manager can set you up for investing success from the beginning.
- Not having a property investing strategy: Understanding how to get your foot in the property door is key to becoming a successful investor, which means you need to find the best investment strategy to suit your needs and goals.
- Not having a property financing plan: Be sure to know exactly how you’re going to cover the ongoing costs of your investment (such as loan repayments and utilities) and figure out the best loan structure for your investment property prior to taking the plunge.
- Buying the wrong property: This means thinking like a tenant (and understanding what they want from a rental), looking for low-maintenance properties and focusing on finding the right property to deliver the results you want.
- Buying for the short-term: Your rental won’t skyrocket in value overnight, so make sure you’re ready to wait it out before buying an investment house.
- Not leaving enough to live on: Get your finances in order, save up a decent deposit and ensure you’ve got enough left over to cover ongoing expenses to avoid financial stress.
- Selling out of fear: While downturns in the market can be daunting, don’t give in and sell prematurely before your rental has had time to grow in value.
- Not hiring a property manager: While self-managing your investment property might seem like a way to save cash, it’s often more time and effort than you realise. If you’re tossing up which approach to take, we’ve put together a comparison guide to the pros and cons of different types of property management.
Know the common mistakes so you can avoid them
If you want to know more in-depth about the pitfalls investors frequently make, read our past article.
Treating your property like a business
Securing a rental property comes with a totally different agenda to buying a home. But, it can be easy to fall into the trap of letting your emotions get in the way when buying your first investment property.
When we let our emotions cloud our judgement we put ourselves at risk of making poor decisions. This is why you should treat your investment property like a business.
Always remember that you buy a rental property for financial security and gains, not for pleasure. That's what it means to treat your property like a business.
Not sure how? Let’s look at the key things you need to keep in mind as a property investor:
- Take your emotions out of the picture: That means not offering discounted rent to friends or family, raising the rent when you know you should and using a middle-man (like a property manager) to help you stay emotionally un-invested.
- Keep tabs on your expenses to save big at tax time: Get your head around the expenses you’re able to claim and use a tech-driven filing system to maximise what you can claim for when June 30 rolls around.
- Invest in the right team of experts: Having a team of professionals by your side will mean you've got helpful advice and personalised guidance at your fingertips. They can help you make more objective decisions.
- Foster positive relationships with your tenants and property manager: While you want to focus on maximising your returns, it’s important not to lose the human element while doing business.
Learn how to treat your property like a business
Helen Collier-Kogtevs shares her expert insights on how you can make smarter decisions for your investment property
How to avoid a dud investment property
It’s the question on every investors’ mind: what do I need to think about when choosing the right investment property?
In fact, knowing what red flags to avoid is just as valuable as knowing what to look for in a good investment property.
Here are two key warnings signs to watch out for:
- The property doesn’t match the search criteria for tenants in the area: It’s not a wise idea to invest in a 1-bedroom apartment if the majority of tenants are looking for 3-bedroom stand-alone houses in the area.
- Repairs and maintenance will cost you more than a renovation: Structure issues, water damage and signs of pests are all costly issues that you want to avoid having to pay for as an investor.
So, what questions should you ask yourself when inspecting potential investment properties?
- Are the rental incomes of this property in line (or better than) market rental rates in the area?
- When were the rental figures last reviewed?
- Have you obtained the best loan for your property?
- Is there potential for your property to generate a secondary income (such as leasing out the garage or car space)?
- Is the property new or old and how much maintenance would it require?
Avoid buying a dud investment property
Use our checklist with the 10 questions you should ask yourself every time you consider buying an investment property.
Now that you have the mindset of a property investor, let's talk property finance!
Chapter 3. Financing your investment property
Your approach to property finance could mean the difference of thousands of dollars lost or gained.
Not only that but how you finance your investment property will have an impact on your personal finances, cash flow and stability as well. It's at the heart of any investment strategy, really.
This means that you need to understand how investment property tax works (and how it differs from your normal home property tax), the difference between negative gearing and positive gearing, as well as which property loan structure to choose.
By finding the right approach for your financial needs and investment goals, you'll increase the chances of having a smooth sailing on your investing journey, and you'll reduce the risk of suddenly having to sell your investment property.
Keep in mind that none of this is financial advice and that you should speak to a qualified financial advisor about your specific circumstances before you make any of the decisions we're about to get into.
Investment property tax vs home property tax explained
Many first-time investors don’t realise there are specific tax obligations that apply to investment properties.
To save you from getting caught out by a big tax bill when buying, selling or renovating your investment property, we’ve broken down everything you need about investment property vs home property tax below.
Home property tax explained
The property you live in is considered your primary residence. Generally, this means you won’t need to pay tax if you sell your home for a profit.
Plus, you usually can’t claim any expenses incurred when buying or selling your home.
However, you might need to pay tax on your home if:
- You’ve purchased a second property, you may be liable for capital gains tax.
- You live in certain states, stamp duty and levy land tax may apply.
- You purchase a home to renovate and sell for profit (‘house flipping’), there are potential tax and GST implications.
Investment property tax explained
When you buy an investment property that you don't intend to live in, then you're subject to be taxed on your income from that property.
The rent that you collect from tenants is subject to your income tax, and the gains you make when you sell the property down the line is subject to capital gains tax.
This also means that losses are tax-deductible. This is why so many choose to have a negatively geared property.
In short, you can view your investment property as a job. It's a source of income, and it's accordingly subject to get taxed.
5 tips for reducing tax on investment property
Maximise the returns on your investment property with our tips for reducing your property tax.
Which investment property expenses are tax deductible?
Rental expenses you can claim in the same financial year are:
- Council and land rates & strata fees.
- Utility bills.
- Property advertising fees.
- Property management fees.
- Property maintenance and repair costs.
- Landlord insurance.
- Certain legal costs (such as evicting non-paying tenants).
Rental expenses you can claim over a number of years are:
- Borrowing expenses: Costs related to taking out a loan to buy an investment property (like loan establishment fees, stamp duty on your mortgage).
- Capital expenditure: Including improvements and depreciating assets (like white goods and furniture).
Get an in-depth explanation of investment property tax
Get tips for managing your taxes and more details on capital gains and tax on your investment property in our guide.
Negative gearing vs positive gearing
Negative gearing and positive gearing are the two most common ways to "gear" your investment property.
"Gearing" is financial jargon for borrowing money.
If you browse online forums you'll probably see questions about whether to negatively gear or positively gear their investment property. We'll explain what the two means as well as the benefits and drawbacks of both.
What is negative gearing?
Negative gearing is when the income generated from your investment property is lower than your expenses, meaning you make a net loss on an annual basis.
Some of the advantages of a negatively geared property include:
- Tax savings: you’ll be able to deduct any losses you make from your taxable income, which can lower your property tax bill.
- Capital gains tax on your investment property: this approach banks on your property increasing in value by the time you sell to counteract any losses you’ve incurred over the lifetime of your investment.
On the other hand, some of the disadvantages of negative gearing include:
- Reduced cash flow: you’ll need to have the cash-on-hand to cover the cost of maintenance, repairs and unexpected bills.
- Capital loss: if your property doesn’t increase in value, you’ve left yourself vulnerable to making a significant loss.
Learn when to negatively gear your property
Read our in-depth article to understand if negative gearing is right for you, as well as the tax implications.
What is positive gearing?
If you’re looking for a stable source of passive income, positive gearing might be a better option for you. A positively geared property generates more income than it costs in expenses to run, giving you positive cash flow.
The pros of positive gearing include:
- Extra cash flow: you’ll be generating a new stream of income which means more cash in your pocket.
- Boosts your serviceability: banks will look at you favourably when deciding whether or not to grant your loan application.
- Financial security: having a positive cash flow means you can weather fluctuating market conditions with added confidence.
On the flip side, some of the cons of positive gearing include:
- Losing out on tax benefits: your profits will be added to your taxable income, which will likely increase the amount of tax you have to pay.
- Low capital growth: it can be harder to find properties that fit this strategy in high-growth areas, meaning you might not receive a big payout when it comes time to sell.
- Slim profits: although you will receive the positive cash flow, it’s not likely to be a big sum of extra income on a weekly basis.
When tossing up whether to positively or negatively gear your property, it’s important to consider what you want from your rental. If you’re looking for a consistent stream of passive income, positive gearing might be a better option. However, if you’re looking for tax benefits and are happy to accept ongoing losses in the hopes of making a capital gain, negative gearing could be a better fit.
Learn when to positively gear your property
Read our in-depth article to understand if positive gearing is right for you, as well as the tax implications.
P&I vs IO - which loan structure is best for you?
The way you structure your home loan is key to securing the right interest rate to suit your investment property goals. And when getting started in property investing, interest rates are something you need to be aware of (especially when applying for loans).
There are two common loan structures to choose from, including principal and interest loans (P&I) and interest-only loans (IO).
You've probably seen the abbreviations online and wondered what they meant. Fret not! We'll explain it in this next section.
What is a principal and interest loan?
A P&I loan means you’re repaying the loan amount and interest at the same time.
Some of the benefits of a principal & interest loan include:
- You’ll likely pay less in interest over the course of your loan
- Banks are more likely to offer you a better interest rate if you opt for a P&I loan
- You’ll repay your loan sooner and speed up your path to owning your property outright
But, some of the disadvantages of a principal & interest loan include:
- Higher repayments from the beginning of your loan
- Added financial straight if you’re paying off other debts or renovating at the same time
What is an interest-only property loan?
An IO loan means that for a certain period of time your repayments will only cover the interest on your loan. After that period, you’ll switch to paying both the interest and the amount you borrowed (principal and interest).
The pros of an interest-only loan include:
- Lower repayments during your initial loan period
- The ability to save or prioritise other expenses
- Extra time to spend on furnishing or upgrading your investment property
However, some of the cons of an interest-only loan include:
- You might pay more interest over the life of your loan
- If might take you longer to repay your loan (as the loan amount doesn’t decrease while you’re paying interest-only)
The key to finding the right loan structure is to consider your own financial situation as well as current market conditions. If you’re able to make higher repayments and the market is strong, a P&I loan will help you build equity faster. However, if you’re still paying down another mortgage, on a lower income or the market is fluctuating, a IO loan will keep your repayments lower to help you manage your cash flow.
Learn the best loan structure for your property investing journey
Get an in-depth explanation with a case study to boot in our previous article.
How to get the best investment property home loan rates in Australia
If you ask three different people "which bank has the best home loan rates?" you'll probably get three different answers.
At the end of the day, finding the best home loan rates is going to come down to you and your research, so we recommend you rely on that.
The key to increasing your chances of scoring the best home loan interest rates is to understand how to compare mortgage providers.
Generally speaking, investment property loans tend to be more expensive than home loans (attracting higher interest rates and other costs).
However, there are practical steps you can take to get the best loan out there, including:
- Using home-loan comparison tools: tools such as uno’s Home Loans’ comparison can show you which providers are offering the best rates on the market.
- Get pre-approved for a home loan: this takes uncertainty out of the equation and means you know exactly how much a lender is willing to loan you.
- Find a property you can truly afford: it’s good practice to add on 10% onto the estimated value of the property to consider if you can actually afford it.
- Boost your likelihood of getting the home loan you want: make sure your finances are in order to ensure your lender can formally approve your loan, including having a healthy savings balance, good credit history and ample income.
- Increase your borrowing capacity: this means paying down your existing debts, reducing your credit card limits (or getting rid of them altogether), applying for a joint loan, opting for a positive cash flow strategy and looking for a 5-year fixed rate loan.
Save thousands of dollars on the loan for your investment property
Use our detailed guide for finding the best home loan rates.
Now we’ve got our head around how to finance our investment property purchase, let’s look at what’s actually involved in purchasing an investment property (every step of the way).
Chapter 4. Buying an investment property step-by-step
At this point, you know that investing in property is the right go for you, you have the mindset of a property investor and you have your property finances planned out. Now it's time to get down to business - buying an investment property.
You've probably guessed that buying real estate is not like the movies where you walk into an open home and say "I'll take it!" You can do that if you want of course, but there's plenty more work to be done before the purchase is official.
We want to make sure you buy the right investment property, so we'll help you out with all the steps you need to make before buying an investment property.
In this chapter we'll cover:
- Doing your market research to buy the right property for your future tenants
- Doing your own thinking to buy the right property for YOU
- How to buy an investment property
- A to-do checklist after you've made an offer
1. Doing your research: What numbers matter and where to find them
A good investment starts with good research. The first step to buying an investment property is to use data and research to decide where you want to buy.
While there are lots of stats and data to wade through, here are the most important numbers to pay attention to:
- Property value trends: Shows how the market has performed in specific areas over the years. This data will help you understand each area’s potential for capital growth and the likelihood of an investment property in this area rising in value.
- Days on market: Helps you figure out if properties are selling quickly or not. If this figure is low, it’s a good indication that buyer demand is strong.
- Auction clearance rates: This percentage indicates how many properties are sold at auction based on the total auctions conducted that weekend. Generally speaking, the higher the clearance rate the higher the demand for properties (which helps you scope out the level of competition in this area).
- Vacancy rates: This shows the percentage of rental properties that are vacant at any given time. High vacancy rates tend to indicate that there isn’t a high demand for investment properties in that area, while low vacancy rates indicate there are more renters than rental properties available.
- Rental yield: Your rental yield is how much rent your property brings in as a percentage of your property's value. A higher rental yield means a better cash flow, but also more taxable income.
These are all some key metrics investors look at to determine if a location has merit to invest in. Depending on what your goals are, you might put more weight on some metrics over others. That's what we'll walk through later.
See which suburbs are growing in Australia
Get our in-depth analysis of suburbs in Australia to find the best suburbs to invest for 2021.
2. What to look for in an investment property
So, what specific features have the potential to add value to your investment property? Some of the top items that should be on your list include:
- Number of bedrooms
- If there is a separate dining room
- Size of rooms and wardrobes
- Number of bathrooms
- Size and state of the kitchen
- How much storage the property offers
- If it includes a garage
- Level of security (the will determine how much you pay for insurance)
Plus, it’s important to thoroughly check the general state of the house. Check for cracks and holes in the walls, mould and water stains as these can be expensive issues to fix. Plus, sagging ceilings, rusted gutters and broken roof tiles are all warning signs to look out for.
3. Preparing to buy an investment property
Before you head out to open homes, it’s crucial you have a clear idea of your investment strategy, goals and which kind of properties will deliver the results you want.
- Clarify why you want to invest in property: Do you want a stream of reliable, passive income? Are you willing to incur losses along the way to lower your tax bill (and hopefully make a capital gain)? Make sure you understand your goals before you start your property search to make an informed purchase.
- Establish what type of property you’d like to invest in: With your investment goal in mind, look for properties that will help you get there. That might be a standalone home in an in-demand suburb (if you’re looking for capital growth) or a turnkey apartment in the inner city (if you’re looking for stable returns).
- Research potential areas and locations: Now it’s time to look at specific suburbs that offer low vacancy rates, high tenant demand and the potential for value increase over the long term.
- Estimate your income or cash flow: To help you make your decision, it can be helpful to estimate your rental yield and the potential positive cash flow you might generate.
- Understand the risks: There are no guarantees that your property will rise in value and periods of vacancy may lower your rental returns, which are both scenarios you need to be prepared for as an investor. Are you in a financial position to go in a deficit if worst comes to worst?
9 things you need to know before investing in property
We've broken down what you need to check, decide and be aware of so you can pick a good investment property with confidence.
4. How to buy an investment property
In practical terms, what does purchasing an investment property involve? Here are some of the typical steps you’d expect to take as part of this process.
- Secure pre-approval: This involves chatting with a bank or lender to find out how much they’re willing to lend you for a home loan. The sooner you get this done, the sooner you know exactly what budget you have to work with.
- Create a shortlist of potential properties: Browse real estate websites such as Realestate.com.au and Domain to find potential properties that meet your investment criteria.
- Attend open homes and narrow down your list: After attending open homes and inspections, you’ll be able to create a shortlist of the best of the bunch.
- Dig deep to find the best option: Now comes a time for flexing your analytical skills. You should compare the properties' key metrics like their price and growth rate, their amenities and location and find the property with the edge.
- Make an offer: Once you’ve found a property you’re ready to invest in, you’ll be able to make an offer (preferably in writing to keep a clear record of things) and negotiate on the sale price with the real estate agent selling the property.
Once your offer is accepted, you’ll have a stack of paperwork to sort out before the property is officially yours. Let’s dive into those steps now.
5. What happens once you’ve purchased a property
Once your offer has been accepted, your solicitor will arrange the exchange of contracts. This part of the process establishes the terms and conditions of the sale and is a legally binding document to protect both of your interests.
After that, here’s the paperwork and steps you’ll need to follow:
- Pay the deposit: this is done on the date the contracts are exchanged, and will usually be paid to the real estate agent (and is held in their trust account).
- Pay stamp duty: the needs to be paid within three months of signing the contract and is calculated based on the purchase price of the property.
- Transfer documents: this is prepared by your solicitor and taken to the Office of State Revenue to be stamped alongside your Contract of Sale before being signed by the seller.
- Survey report: this is either provided by the seller or your conveyancer will obtain one that shows the boundaries of your property and fence lines.
- Utilities and land enquiries: this is done to check your council and water rates, if there are any arrears and if the land is subject to a land tax charge.
- Mortgage document: this is provided by your lender and will outline the terms and conditions of your loan (how much you need to pay, when and how long your loan period lasts).
- Requisitions of title: these are sent to the seller by your solicitor to ensure you have a clear picture of the property you are buying and any ongoing disputes with neighbours.
- Settlement statement: this is sent closer to the settlement date with details about the final amount owing, along with any changes to the rates and taxes you’ll pay.
On the day of settlement, your transaction of the sale is complete and you become responsible for insuring the property (so much sure you have this sorted out before this date).
Phew, that’s a lot to digest. While it’s important to understand all the steps involved in investing in property, it can be a lot of hassle to get started. That’s where reaching out to services such as Wealthi can be helpful, as they offer a simple planning tool and zero brokerage service to help you get into the market sooner.
Now we’ve looked at the step-by-step process of buying an investment property, let’s explore some alternative ways to invest in property.
Chapter 5. Alternative ways to invest in property
Investing in property can seem like an option reserved for the old and wealthy. However, there are low-cost ways to get into property investing that ditch the need for huge amounts of capital to get started.
Let’s look at some alternative investment strategies you could consider, including:
- Smart financing strategies
- Taking part in a real estate investment group (REIG)
- Joining a real estate investment trust (REIT)
- Exploring fractional ownership
Alternative property finance strategies
Yes! There are low-cost options to investing in property out there that can help you work around the strict deposit requirement for home loans.
While having a high income and substantial deposit ready-to-go can make your loan application process easier, there are low-cost ways to invest in property. Let’s look at how to buy an investment property with little money, which includes:
- Leverage your existing property’s equity
- Accessing a guarantor loan
- Considering a joint application
1. Use your home or investment property’s existing equity
By drawing on your existing (how much of the property you actually own), you can boost your borrowing power and lower the upfront costs of securing an investment property.
In most cases, you’ll be able to access up to 20% of your property’s value from a lender to fund your next move.
2. Access a guarantor loan
To lower the risk for lenders, you can nominate a guarantor to offer up security for your loan. If you’re unable to service your loan down the line, they’ll be able to cover the costs for you.
This means you avoid paying hefty fees (such as Lenders Mortgage Insurance), to lower the cost of securing an investment property.
3. Consider a joint application
By teaming up with a partner or family member, you and your co-applicant are equally responsible for servicing your mortgage. This can boost your chances of approval and lower the cost for you (as long as you both ensure you’re committed to meeting the repayments).
How do real estate investment groups work?
A real estate investment group (REIG) enables you to invest in property without having to manage the property yourself. That’s because the REIG purchases or builds a block of apartments that are sold to investors like you, managing all the admin, maintenance and tenant selection on your behalf.
Some of the pros of REIGs include:
- A stress-free, low-touch way of owning an investment property
- A simple way to generate income and build equity (minus the effort)
However, there are some cons to REIGs, including:
- If vacancies spike across the complex, your returns might be impacted
- Higher fees can eat away at the rental income you earn
- Lack of oversight means this can be a riskier approach
How do real estate investment trusts work?
Another alternative investment strategy is to use a real estate investment trust (REIT), which lets you invest in property using stocks. It’s similar to a managed fund as investors pool their money together to invest in properties.
If you’re considering how to join a real estate investment trust, it’s important to know that in Australia, REITs (known as A-REITs) are traded on the ASX. This gives investors the chance to take part in as little as a $500 initial investment.
The pros of using a REIT include:
- Earn rent and capital growth for a low-cost and without purchasing a physical property
- You’ll likely earn dividends to give you an extra stream of income
- You’re not locked in and have the flexibility to sell when suits you
On the flip side, the cons of using a REIT include:
- You’ll need to do your due diligence to make sure the management team have a low level of debt
- If you’re investing in a new building, there’s a development risk to consider (a.k.a. will these properties be successfully leased or not?)
- Check the dividend payout ratio to understand your potential returns
What is fractional ownership?
This is another pooled investment strategy that splits the cost of a single property into shares that are sold to investors.
To get started in fractional ownership, you’ll need to use a fractional investment platform to earn rental income (and potentially receive capital returns when the property is sold).
The pros of fractional ownership include:
- Eliminates the high barriers to entry for first-time investors
- Gives you the flexibility to sell your shares at any time to access capital gains
- Being able to diversify your funds across multiple property types from day one
In contrast, the cons of fractional ownership include:
- Your returns may be lower (as you’re only invested in a portion of the property)
- You don’t own tangible property, so you can’t decide to become an owner-occupier down the line
Now we’ve explored a range of alternative (and low-cost) investment strategies, let’s turn our attention to what to do once you’ve got an investment property under your belt.
Get your foot in the door of an investment property with less capital
We explain the 7 most common options in-depth in our previous article.
Chapter 6. After you've bought the investment property
Your property investment journey doesn't end once you've bought a rental property. Your next focus should be to increase rental property income and maximise the returns on your investment property.
Matter of fact is that picking the right rental property isn't the key to anything and everything. But look on the bright side instead, it means you have agency and opportunities to increase your returns through your own thriftiness.
So, let’s look at how you can get the best return on your investment in real estate to enable you to build a successful property portfolio.
Take steps to make your rental property stand out in the market
Many investors ask experts or read online about the best suburbs to invest in Australia.
It's good that you're taking on expert advice, but the downside is that others do the same, and likely get similar recommendations.
The end result is that your investment property might be situated in a saturated market.
This happens a lot, and the consequence is that many struggle to attract tenants. So, how can you make your rental property stand out?
If you're investing in suburbs that get a lot of hype, you put yourself at risk of sitting on a rental in a saturated market.
Leigh Patrick, Interior Designer and Senior Manager of Portfolio & Acquisitions at :Different revealed three key things you can do:
- Invest in renovations tenants truly want: Don't spend your money on improvements that won't move your bottom line.
- Professional photography is a must-have: This is a one-off expense that can speed up the process of securing a tenant significantly.
- Upgrade and repair your property with preventative maintenance: When you’re between tenants, consider proactively replacing fly screens, giving your rental’s walls a fresh coat of paint or even updating your light fittings.
Increase the appeal of your investment property with our tips
Leigh Patrick reveals the top 5 tenant requests in a rental. Learn how to attract more tenants and reduce your vacancy rates.
Grow your property's value and rental yield
If you’re wondering how to make money in real estate, you want to do everything you can to boost your property’s earning potential (and reduce the costs from your investment property).
That’s where rental yield comes in. This calculates your rental income minus any costs and expenses you incur, to figure out how much you actually make from your investment property.
A “good” rental yield depends on where you live: you’d want to see a yield of 3-5% in capital cities while you’d be looking for over 5% rental yield in regional areas.
So, what’s the secret to maximising your investment property’s rental yield?
- Set the right rental rate for the current market conditions
- Follow smart real estate marketing strategies
- Invest in quick, cost-effective improvements that will add value
- Upgrade the quality of your property with proactive maintenance
- Consider accepting pets
On the other end of the spectrum, here are some of the top ways to reduce the cost of your investment property:
- Facilitate regular inspections to catch problems early
- Secure the best rate on maintenance and repair quotes
- Check if you can get a better mortgage rate
Maximise your investment property's returns
Learn why rental yield is important to understand and get in-depth tips for increasing returns and reducing costs.
Consider bringing a property manager on board
Taking care of your investment property requires serious time and effort.
That’s why many investors choose to hire a property manager to handle things like collecting rent, finding tenants, managing repairs and maintenance, hosting regular inspections and offering professional rental property advice.
80% of property investors in Australia use a property manager.
There’s a stack of benefits to using a property manager, including:
- Keeping your mind off your rental if it’s a set-and-forget investment for you
- Saving you tonnes of time on chasing arrears, property maintenance and finding tenants
- Getting an expert to manage your property (and boost your returns)
- Helping to decrease risk by having an expert by your side from the beginning
Broadly speaking, a property manager will usually cost between $80-$250 per month in fees. But there is a range of different models used by agencies to charge property management fees, so it’s important to do your research to make sure you’re getting a fair rate.
For most investors, juggling their day job with the demands of managing an investment property can quickly become overwhelming. And think about it like this: would you really want to quit your full-time role (which pays thousands of dollars a month) to DIY your rental’s management or hire an experienced property manager to handle this process from start to finish for just a few hundred dollars a month?
Full-service property management for $100/month
See what's included in our flat and fair property management fees.
Renovate your investment property when needed
Strategically renovating key parts of your investment property can help you to significantly increase your rental yield, keep your tenants happy and even help you successfully raise the rent.
Let’s look at the four key benefits of renovating your rental.
1. Helps you secure high-quality, long-term tenants
Reliable tenants are on the hunt for desirable, newly renovated properties that are clean, modern and attentively maintained. By attracting and securing these dream tenants, you’ll reduce the chance of vacancy significantly.
2. Reduces your maintenance costs
Improving the quality of your property and proactively renovating high-traffic areas (such as bathrooms and kitchens) can safeguard the quality of your rental and lower the cost of repairs over the lifetime of your investment.
3. Improves your property’s rental return
Even older properties can be transformed into new and desirable rentals with strategic real estate renovations. Plus, you’ll be able to charge and premium for rent to boost your all-important rental yield.
4. Increases the value of your property
When it comes time to sell, a newly renovated property is more likely to attract a higher sale price and deliver capital gains for you.
Some of the key investment property renovation tips that add more value to your rental property include:
- Replacing tired flooring for durable carpet, neutral tiles, or luxury vinyl flooring
- Update fixtures in the bathroom and kitchen to modernise your rental on a budget
- Add extra space by building a granny flat
- Improve your property’s privacy and security with new door locks and outdoor lighting
Unlock value through rental property renovations
Learn the renovations that add the most value to your rental property. Get our guide for how to plan a renovation project.
Start thinking about your next investment
Something that should also be on your mind is the next big step. You want to think about building a property portfolio, as it's important to increase your financial security and gains.
Property takes time, so you want to make the most of that time by having as many properties gaining value at the same time.
But, it’s important to ensure your portfolio is balanced by investing in different types of properties in different postcodes to increase your returns and lower your exposure to risk.
Here are the three key steps for how to build a property portfolio:
- Create a mix of high rental yields and high capital return properties: this ensures you’re generating a reliable stream of passive income (to pay for repairs and maintenance) and setting yourself up to earn a positive return when it comes time to sell.
- Refinancing your property to access equity: this makes it easier to finance a second investment property sooner and can lower your interest rate (if you put your existing property up as security for your new loan).
- Diversifying your investments: this will reduce the impacts of ups and downs in the property market and ensure you have a resilient portfolio that continues to deliver strong returns despite turbulent market conditions.
But, what should my next investment be?
It all comes down to what your goals are:
- If you’re looking for capital growth: look for rentals in locations that are likely to increase in value, such as standalone homes in the outer suburbs of capital cities that show the greatest potential for capital growth.
- If you’re looking for higher rental yields: look for properties in areas experiencing high demand where house pieces are low and rent prices are increasing to ensure you achieve a strong rental yield of between 8-10%.
- If you’re looking for a balance of both: typically townhouses and duplexes (particularly in the outer suburbs of capital cities) can be purchased at lower rates while still delivering good rental returns and the potential for substantial capital growth.
How to build a balanced property portfolio
Ensure you don't put all your eggs in one basket with our tips for your next investment.
Tips for reducing investment property tax
Your tax returns are a great source for reducing the costs of your investment property.
- Keep clear, up-to-date records of all your expenses.
- Understand the difference between capital works, repairs and maintenance.
- Claim capital assets and borrowing expenses.
- Track your depreciation and capital works schedule.
- Negatively gear your investment property.
Increase the profits from your investment property with our tax tips
Learn the difference between capital works, repairs and maintenance on your tax returns, and other useful tips for tax time.
Now you’ve nailed everything you need about owning and getting the best return on your investment property, let’s look at when (and how) to sell your investment property.
Chapter 7. Selling your investment property
The time will come when your investment property has increased in value and you've decided it's time to cash in.
There's a bunch of things to consider, and how you sell your investment property is actually a major part of maximising your returns on your investing journey.
Here's what you need to know when deciding whether to sell or keep your rental property.
The signs that indicate it's time to sell
You might be scared that you're selling too early, and that's good. It shows you've got the investor's mindset now!
Here are 4 signs you should sell your investment property:
- The market doesn’t offer potential for future growth: If the area you’ve invested in has stagnated (such as areas outside capital cities with little population growth) and vacancy rates are rising, it could be a good move to sell before interest from buyers stagnate.
- You’ve recently retired or your income has changed: If you’re working on reduced hours or are getting close to retirement, now could be a good time to sell to leverage your lower-income and ensure you don’t pay too much in Capital Gains Tax. This can help you maximise your profits from selling your investment property.
- Your investment property isn’t performing well: There are steps you could take to improve your rental returns, but if your property still isn't performing how you expect it to and it's eating away at your financial stability, you might want to let go.
- You’ve spotted better investment opportunities: If you’ve found a more lucrative investment property in an up-and-coming market, selling to free up capital to buy might be the right go.
But before you go ahead and sell, it’s important to do your research to understand how the market is performing. In some cases, it’s a wiser move to hold onto your property, such as:
- If you’ve bought the property recently (in the past five years): In many cases, the costs of selling will outweigh any gains you’ve made, meaning it’s more likely you’ll make a loss.
- If your property is in good condition and making you money: Keeping a property like this give it more time to increase in value and can ensure stable, financial returns for you.
- Your current property is boring you: This is a good sign that times are stable and low-touch, meaning you’re in a good position to generate positive rental income. Sometimes we get caught up with the exciting idea of a new investment, even though the one you’re sitting on is doing well.
Reliable sources such as SQM Property Indexes and CoreLogic Housing Updates give you an inside scoop into property values, auction results and more in your local area to help you understand when it’s the right time to make a change.
Plus, it’s also a wise move to hold onto your property for as long as you can (to give it the best chance of rising substantially in value).
However, that isn’t always possible or the right move if you fit the criteria above. So, make sure to do your research and consider your own circumstances before deciding to sell up.
Understand if it's time to let go of your investment property
Everything you need to know before you decide whether to sell or keep your rental property.
Your step-by-step guide for how to sell your investment property
Once you’ve made a decision to sell, it’s time to get the wheels in motion to make your sale a successful one. Here’s what the experts recommend you do when selling your investment property.
1. Understand how much your property is worth
This involves chatting to real estate agents in your area and getting a range of professional opinions on your property’s value. There are also helpful online property valuation tools that can help you estimate your property’s value and so much more.
Heading to local auctions for similar properties in your area is also a helpful way to assess market demand and give yourself a ballpark figure to aim towards.
2. Compare real estate agents to find the best fit
Doing your research and asking the right questions is key to finding the right agent for you. Make sure to consider things like what fees they might charge as well as their sales approach to ensure you get the best experience and price possible.
3. Selling your investment property and tax implications
There’s a stack of expenses associated with selling your property, including agent’s fees, conveyancing fees, marketing costs and more. It’s important to understand the costs of selling a property to make sure you're going into the process educated and informed.
Plus, you’ll need to factor in Capital Gains Tax (CGT), which can lower your profits from selling considerably. Make sure to do your own calculations to figure out how much you’re likely to be charged in CGT before you get started.
4. Choose between an auction or private treaty
Your agent will help you decide which method of sale will work best for your situation and property goals. Ultimately, it comes down to how the market is performing and whether demand is high enough to ensure a successful auction or not.
5. Should you sell a tenanted property?
While it’s often preferable to continue receiving rental income while you’re trying to sell, it can add a layer of complexity to the process of selling your investment property. Here’s what you need to weigh up when deciding whether to sell a rental property with tenants or not:
Some of the pros include:
- You’re still earning income throughout the process
- Buyers might be won over by having an already tenanted property
- Current tenants assure other investors it has good potential
Some of the cons include:
- You’ll need to give plenty of notice to your tenants before inspections
- There’s no guarantee that your property will be presented in the best light
- Tenants might be an inconvenience and drawback for buyers
With all of this in mind, it’s also important to have a clear idea of every single step involved in selling your property. Before you make your sale, follow Upside's house selling checklist to make sure you never miss a step.
While selling a rental property can be a powerful way to reap the rewards of your investment, it needs to be done at the right time and with plenty of research behind you.
When it comes to investing in real estate, the more you know the better placed you’ll be to make proactive, savvy decisions about when and where to invest. That means starting with the basics such as why you should invest in property, understanding the common mistakes to avoid, learning how to finance your investment property and having an expert explain the step-by-step process to secure your first (or next) rental property.
Ultimately, seeking professional advice and investing in a team to help you manage your investment property will be the key to help your property stand out from other investors and generate the kind of returns you’re hoping to receive.
An accountant will be able to deliver strategic advice about how to navigate your tax obligations and which expenses you should be claiming. A property manager will be able to take work off your plate by handling the end-to-end process of finding, managing and keeping your tenants happy to safeguard your rental returns. Plus, they’ll be able to help you make the call about when is the best time to sell your property as well.
It’s by using these experts that will ensure you’re making the most appropriate decisions about your investment property and maximising your returns throughout the life of your investment.
Have an expert managing your investment property
From leasing to maintenance, and everything in between, we’ve got you covered
Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.