Everything you need to know about property investment in a nutshell
It’s been proven time and time again that property investment is a sure-fire method of making the most of your Australian Defence Force (ADF) wages for future financial success. With informed decision-making, a solid understanding of the basics, and a proven investment strategy, property investment can provide an additional income and long-term wealth.
In this Property Investment 101 blog post, the experts at Capital Properties will cover all the basics you need to know about property investment in Australia. We’ll discuss why you need a savings plan, what your minimum savings amount should be and how and why you need to get pre-approval. As well as why you should engage a Buyers Agent, and lots of other vital information you’ll need before you can move forward with property investment.
Come along to a FREE Capital Properties Discovery Session that’ll take you through Property Investment 101 in the most efficient way. Our team works with ADF members who are just starting out, all the way through to helping our clients manage multi-million-dollar portfolios. The best time to start is now.
On the go? Here’s 30 seconds of take outs:
- Start a savings plan by looking at your income & expenses, then set up a regular direct debit into a property investment fund.
- Capital Properties recommends a minimum saving of 10% of the purchase price of the property.
- Check out eligible Australian Defence Force (ADF) financial benefits.
- Getting loan pre-approval is essential as it saves time, money & heartache.
- Work with a Buyers Agent who understands the ADF lifestyle & someone who specialises in regional and local area investments.
- Research: location, property type, rental yield, capital growth, building inspections & financing options.
- Work out cash flow and investigate tax implications.
- Continue to monitor and adapt your property investment strategy for future growth.
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Why do you need a savings plan?
It’s essential to have a well-structured savings plan in place before you can even begin to think about where and when to invest.
As an ADF member, using your steady income to build your savings with the goal to invest is key to creating the future of your dreams. A savings plan helps you set realistic financial goals so you can know when you’ll have enough for a house deposit.
How to start a savings plan?
- Read our ‘5 Top Tips to start your savings plan’ blog post.
- Work out your current expenses, including rent/mortgage, energy bills, telephone & internet, medical & dental, groceries, car/transport costs, insurances etc. Capital Properties Budget Planner will help.
- Once you’ve figured out your expenses, look at the surplus, or figure out where you can save some extra dollars, then set a savings goal for each fortnight (or week/ month).
- Open a separate savings account to manage your property investment fund.
- Set up a direct debit so that the money goes into that account before it gets spent.
- Become familiar with your incomings/outgoings so you’ll learn how to manage potential investment costs.
How much of a deposit do you need for property investment?
As a general rule, banks will only lend first-time property investors money if they have between 5% to 20% of the purchase price of the home in genuine savings.
At Capital Properties, we recommend that potential investors save a minimum of 10% of the purchase price of the property to get started. 5% to cover the minimum deposit required to secure the home loan and the remaining 5% should cover the additional fees, such as legal fees, property inspections and potential renovations.
The more savings you have to invest, the better. One, it means you’ll pay less interest over time. And two, with a deposit of 20% or more, you won’t have to pay lenders mortgage insurance (LMI).
Australian Defence Force (ADF) financial benefits for property investment
Australian Defence Force (ADF) members are often eligible for financial benefits that can be used towards property investment. For example, the Home Purchase Assistance Scheme (HPAS), Home Purchase or Sale Expenses Allowance (HPSEA) and the Defence Home Ownership Assistance Scheme (DHOAS).
These benefits/incentives can help you secure a loan with lower interest rates and fewer fees. We’ve discussed these in more depth in the blog post: “Buying a house while in the Defence Force”.
Why you need pre-approval
We’ve written a whole blog post on pre-approval before: “Why being finance ready pays dividends”. In summary, pre-approval is confirmation from a lender that you’re eligible for a certain loan amount based on your financial situation, credit history, and ability to repay the loan. Getting pre-approval for the loan before you start searching for your ideal investment property will save you time, money and heartache.
The benefits of pre-approval
- Pre-approval gives you a clear understanding of your budget, allowing you to narrow down your property search.
- You have a much stronger negotiation position with pre-approval. Sellers often take pre-approved buyers more seriously as they’ve demonstrated their ability to secure financing.
- With pre-approval, you can move quickly when you find the right property, reducing the risk of missing out on a good opportunity.
How to get pre-approval
- Complete a finance application with your lender.
- Provide supporting documents. That’s usually:
- Proof of identification (driver’s licence, passport, birth cert. etc.)
- Proof of employment/income (payslips, tax return, bank statements etc.)
- Proof of genuine savings (deposits made over several years)
- Overview of living expenses and any debts.
- The lender will process your application. All going well you’ll be issued with a pre-approval letter within a couple of weeks (sometimes faster).
- Pre-approvals typically last 3 – 6 months.
Working with a Buyers Agent
Navigating world of property investment can be overwhelming, especially for first-time investors and time-poor investors. This is where a Buyers Agent can provide invaluable help. Finding a Buyers Agent who understands your unique challenges as an ADF member and someone who specialises in investments (in regional and local area markets) are worth their weight in gold.
Why working with a Buyers Agent is a smart move:
- Searching for the right property, attending inspections, and carrying out due diligence takes time that many ADF members don’t have. A Buyers Agent will navigate this for you.
- Buyers Agents have in-depth knowledge of the local property market, including property values, trends, and growth potential. They’ll guide you to make informed property investment decisions.
- Get access to off-market properties with superior investment potential.
- Buyers Agents are skilled negotiators who can secure the best deal for you.
- TheCapital Properties Buyers Agent service will help you find your ideal property and negotiate the lowest price and settlement with ease.
Research: Location & property.
Thorough research is the cornerstone of successful property investment. Before making any decisions, take the time to research various locations, property types, and market trends. Factors to consider include:
Look for areas with strong rental demand, infrastructure development, and potential for capital growth. Proximity to amenities, public transport, schools, and employment hubs can significantly impact a property’s desirability. Think about trends driving the market, for example the recent push towards “Lifestyle and the property decision making process”.
- Property type
Consider the type of property that will appeal to your ideal tenant. Houses, units and townhouses all offer different advantages and potential challenges. Think about the number of rooms required and look for properties with features like air conditioning, off-street parking, and modern appliances that’ll appeal to those tenants. The ADF property buyer checklist will help with some of these decisions.
- Rental yield
Calculate the potential rental income in comparison to the property’s purchase price. A higher rental yield = a more financially viable investment.
- Capital growth
Research the capital growth of the area to determine its investment potential. While past performance won’t predict future results, it can provide insights into the market’s behaviour. Access the Capital Properties Australian Property Market Report for up-to-date property statistics.
- Building inspection
Before you make an offer on an established property, make sure you get a building inspection. It’ll give you a clear idea of the property’s condition and leverage for negotiation if there’s any issues. Our blog post “Why use a building inspector when constructing” is a great place to start.
Property investment financing options
It’s essential to have a good understanding of your financing options. Different loan types can impact your cash flow, tax deductions, and overall financial position. Some common loan structures include:
- Principal and interest loans (P&I)
In a P&I loan, you make regular payments that cover both the principal amount and interest, gradually reducing your outstanding debt over time.
- Interest only loans
With an interest-only loan, you just pay the interest on the loan for a specified period (usually 1-5 years). This can free up cash flow for other investments but won’t reduce the principal amount.
- Fixed vs variable interest rates
Fixed rate loans offer more certainty around repayments, while variable rates can fluctuate with market conditions.
- Offset account
An offset account is a savings or transaction account linked to your home loan. The balance in the account offsets the loan principal, reducing the interest payable on the loan.
Property Investment cash flow and tax implications
As with any source of income, property investment comes with legal and tax implications that you need to be across. During a Capital Properties Strategy Session, we cover everything you need to know about managing cash flow and tax implications, including:
- Rental appraisal
- Interest rates
- Loan amount
- Holding costs
- Cash flow/gearing:
Where the rental return is less, the same as, or more than your expenses and its effect on your annual tax return. Read more in the post “Property cash flow or gearing, negative, neutral or positive”
- Stamp duty:
A state-based tax on property transactions which depends on the property’s value and location.
- Capital gains tax (CGT):
CGT is payable on the profit made from selling an investment property. The rate depends on your income and the length of time you’ve owned the property.
Ongoing Property Investment strategy
It’s essential to monitor and adapt your property investment strategy on a regular basis. You must be aware of tenants’ requirements, property maintenance, market trends, and keep on top of all incomings/outgoings associated with the property
As your financial situation evolves, you can start leveraging your existing property portfolio to expand your investments. This could involve refinancing to access equity or diversifying your portfolio with different property types or other locations.
If you’re still wondering where to start with property investment, the Capital Properties team can help you navigate the entire investment process. Start by booking into our free Discovery Sessions. This property investment 101 will help you make informed financial decisions, so that you can confidently navigate the property market and make the most of your investment opportunities.