“I am privately renting from an owner-occupant and interested in purchasing an investment property in the future. I earn an average wage and have a car loan which will be paid off in within four years. What is the best strategy for me to purchase an investment property?"
- Question from Sharn in Toowoomba, QLD
Top answer provided by:
Mina Nguyen
Hi Sharn,
It is great to hear that you are thinking about purchasing an investment property. There are many things to consider when you begin planning to invest, and the first and most important question is why.
Consider the bigger picture
Why do you want to invest and why property specifically? Understanding your why is important as any financial investment you make should help you move towards your long-term goals.
Investment is simply a strategy to take where you want to go, and there is no ‘one size fits all’ approach that works for everyone. To help tailor an investment strategy that best suits your personal financial situation and goals, I’d recommend seeing a financial planner to ensure you begin your investment journey in the best possible position.
Is property the best type of investment for you?
As Australians, we love property - but it’s not the only investment option out there. Have you also considered shares or managed funds?
In financial planning lingo, property and shares both fall into the ‘growth assets’ category. This means they both tend to fluctuate in value over the short term but offer relatively strong long-term growth prospects.
Shares are generally more liquid (easier to buy and sell) and offer greater flexibility to begin investing with smaller amounts of money. Property, on the other hand, is more tangible and offers opportunities for improvement through renovation if you enjoy a hands-on approach. The choice of investment asset often boils down to personal preference.
Will you still qualify for the FHOG?
First-time home buyers in Queensland may qualify for a $15,000 government grant, known as the first home owners’ grant (FHOG). This grant is only available to buy or build a new home up to $750,000 in value, which you intend to move into within a year and occupy for at least six months.
The FHOG does not apply to investment properties, but the good news is that if you purchase an investment property now you may still be able to access the grant once you are ready to buy or build your first home down the track.
However, if your first real estate purchase is an investment property, you will unfortunately no longer qualify for the first home buyer’s guarantee (FHBG). This is an Australian government scheme that helps first home buyers get into the market with a deposit of as little as 5% and without the added expense of lenders’ mortgage insurance (LMI).
You will also no longer be eligible to claim a first home concession on transfer duty, a Queensland government offering that can significantly reduce the amount of transfer duty you will need to pay on your first property purchase (but only if you intend to reside there).
Saving for your deposit
This is where the rubber hits the road and the fun part begins. Saving your deposit is primarily a question of budgeting and careful cash flow management. But don’t worry, budgeting doesn’t have to be boring or complicated.
Begin by mapping out all your regular living expenses - the essential things, like rent, phones, food and electricity. Then for each pay cycle, work out how much you need to keep aside to cover these essential costs. There are numerous free budgeting tools available to help you with this.
How much is left over? Allocate yourself a little extra money for spending and then save the rest. I recommend using a separate high-interest bank account for your savings, and here’s the key: don’t touch it!
If you have existing debts (you mentioned a car loan) it might be prudent to pay these out first, before you begin building your property deposit. Existing debts can reduce your borrowing capacity, which is particularly relevant in the current environment of rising interest rates and lenders taking a more cautious approach.
Ideally, your initial deposit would cover 20% of the property value, as a lower deposit will most likely require you to pay additional fees for lenders’ mortgage insurance (LMI). Once you have made some headway into your savings plan, I would recommend making contact with a good mortgage broker.
How a mortgage broker can help
A mortgage broker can help you determine how much you can borrow, which bank offers you the best loan for your personal financial situation and the type of property you are looking to purchase, and help you navigate the pros and cons of different loans.
Your mortgage broker will also be able to help you obtain pre-approval to borrow up to a particular amount, which will put you in a stronger position to negotiate terms when it comes to shopping for a property.
When you find the property you want, you’ll feel more confident making an offer knowing your borrowing capacity in advance, and the sellers will also be more inclined to accept your offer if they know you’ve already got the finance pre-approved.
What type of property should you buy?
There are many factors to consider, but some of the most important considerations include your budget, future long-term capital growth prospects, demand for rental properties in the area, and the level of rental income you could realistically expect the property to achieve.
The importance of a good credit history
When it comes to borrowing, your credit history matters. Ensure you always make your car loan repayments and pay your bills on time. A single missed payment can negatively impact your credit score, which in turn can harm your chances of obtaining finance in the future.
Cultivating good financial habits and a strong savings plan now will serve you well in the future and get you into your first investment property sooner.
Best of luck!
Mina
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