Investment Property Tips – What you need to know

  • 19 October, 2022
  • Greg Pierlot

While increasing interest rates and softening property values are challenging for many, they provide an opportunity for lowly geared borrowers looking to buy an investment property.

There are many factors to consider when purchasing an investment property, the most important being property selection – however others to be aware of include:

Investment Property Finance - Affordability

Before approaching the market, it is critical to know where you stand and how much you can afford to borrow:

  • Even if intend seeking an interest only loan to maximise deductibility, can you demonstrate to Lenders you can repay the loan, not only at today’s rate, but also if interest rates increase in the future? (Lenders currently add 3% to the actual rate to test serviceability)
  • Do you have financial resources to cover periods when the property is untenanted, to cover outgoings, and maintenance?

Investing the time to know where you stand before approaching the market can save a lot of time and put you in a much stronger negotiating position.

Converting your home to an investment property

Many Australians work hard to pay off their home loan, (non-deductible debt), to provide the scope to create wealth through property investment.

However, if you intend to convert your home to an investment property, and purchase a new principal residence, then some forward planning is needed.

For example, rather than repaying the home loan in full, it may be better to deposit the funds into a Mortgage Offset Account: then:

  • This will reduce the interest you pay on your home loan
  • Allow you to then use the funds towards the purchase of your new home (which is non-deductible interest)
  • Then convert your Home Loan to an Investment Loan (the rate will be higher – but the interest becomes deductible)

If you are going down this path forward planning and input from your Home Finance Broker and Accountant are essential.

Rent out your home - 6 year rule

Investment properties are subject to capital gains tax. The fact your primary residence is capital gains free is a major bonus for homeowners.

Less well known is the ATO ruling that, if you rent out your home for less than 6 years, you can still enjoy capital gain free status.

Engaging a Buyers Advocate

While it may be tempting to handle the purchase of an investment property yourself, if you are inexperienced in the field, engaging a Buyers Advocate can be a positive move.

A Buyers Advocate can help you source properties, avoid pitfalls and handle negotiations on your behalf.

Although you pay for their services, the cost is modest relative to the cost of property. Their fees are also usually tax deductible.

Buying off the plan - Buying pain?

A few years ago buying off the plan was all the rage, due to the savings in stamp duty .

However, with supply chain disruptions, skilled shortages, a soft market, buying off the plan now carries a higher risk:

  • The project may take longer to complete
  • The property may be worth less at settlement than what you are contracted to pay
  • This in turn may reduce what Lenders are willing to lend – meaning you may have to contribute more to the purchase in order to obtain finance

Spending money to save

When buying an investment property three areas that are worth spending additional money:

  • Obtaining a Building Inspection Report to ensure there are no elements that could necessitate costly repairs or impact the future resale value (e.g. cladding)
  • For newer properties, a Building Depreciation Report to allow you to claim allowable depreciation
  • For newer properties, a Building Depreciation Report to allow you to claim allowable depreciation
  • Engaging a Lawyer or Conveyancer review the purchase contract, (before you sign), to ensure it is in order and details any works to be undertaken

Pricing for risk

Increasingly, we are seeing Lenders on our panel adjust their interest rates based on perceived risk.

One key element of risk is the amount of equity you have in your properties.

Those with less equity will pay more than those that are lowly geared.

Get in touch

Purchasing an investment property can be a great way to build wealth.

Like any investment it is important to do your research and understand what is involved and the risks.

If you would like to learn more about financing property investment and your borrowing potential, don’t hesitate to get in touch.


Greg Pierlot