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We’ll look at a step-by-step method for choosing an investment property. Here are the key points to consider:
Negative gearing occurs when you pay more for an investment property than you receive in income per month. Negative gearing provides a way to use those losses to your benefit, to help balance out how much investors pay in taxes.
As you might imagine, negative gearing is top of mind to many investors after the financial impact of COVID-19. If you invest in a property that loses money, you can potentially use that against your salary to push your taxable income into a lower bracket. So if you were at a high tax rate already or looking to capitalise on the property this year, it could still provide decent returns.
Plus, property is a resilient asset. It is subject to losses, but the price (and the rental rates) will almost always increase over time. If you can hold the property for long enough, you’re unlikely to regret it.
LVR is how much you’re borrowing compared to how much the property is. So if you were putting down 40% of the property, you would have more equity and a better LVR ratio than someone putting down 20%. It’s a critical number for any investor because it’s an easy way for a lender to assess risk. The worse the ratio, the higher repayments will be and the harder it will be to avoid default should something go wrong. This number can also help you assess and meet your own financial needs.
An interest-only loan is one where you won’t pay off any principal until a certain amount of time passes. The advantage of this loan is more affordable monthly payments, making it a common choice for investors. Investors can pay less on tax-deductible debt and more on their own homes (which are deductible). Usually, the period of interest-only payments goes anywhere from 5 to 10 years. Should you only pay the bare minimum, it will not change what you owe.
Principal and interest (P&I) repayments combine both the principal of the loan and the interest. This option will make your payments more expensive than interest-only loans, but potentially more lucrative in the long run as you will be paying off the total amount owed to the lender. An interest-only loan will likely have higher rates, which means that you’ll pay more over time and you won’t have made a dent in the principal amount owed to the lender. You should be shopping around to ensure that you end up with an amortization formula (or the amount you’ll pay over the course of the loan) that you can swallow.
Capital growth has everything to do with your yearly returns. A high-quality investment property can have an annual growth rate of somewhere between 6 to 10%. A lower-grade property might be anywhere between 1 to 4%. This means that you should be less interested in finding bargain-basement properties. Even if you pay a little over market value, you’re likely to wind up with a property that can make your investment more than worth it.
No matter what is available on the market when you’re ready to buy, there’s always a property that’s right for you.
If you’re looking for the best option, Shore Financial is the #1 independent mortgage broker in Australia that has the experience and proven results to guide you through your investment journey.
Going at it alone can not only be time-consuming, but it can also be risky and cause you unneeded anxiety. The wrong financial structure can hinder your portfolio for years. We take the time to understand how you live, who you work for, and what you’re striving to achieve. It’s the Shore Financial difference. If you’re ready to achieve big goals this year, contact us today to learn more about how we can help.
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