How to Buy An Investment Property in Australia

Australians are big fans of property. It’s an asset we can see, touch, add value to, and a well-chosen property can be a source of long term wealth. But there are also pitfalls that can catch investors out. If you’re thinking of getting into the market as a landlord, we look at how to buy an investment property.

How many Australians own an investment property?

Figures from the Australian Bureau of Statistics (ABS) show just how popular residential property is as an investment. One in five of us own at least one other property in addition to the family home, and while for some that means owning a holiday home, the ABS says close to 1.5 million households own a property they rent out.

While the majority (68%) of landlords have just one investment property, owning multiple properties is not uncommon. ABS data confirms one in three property investors own several rental properties.

Why buy an investment property?

Investment property is a popular goal for many people – research by HSBC (2019) found Australia is one of the most property obsessed nations in the world. It showed we spend an average of 2.5 hours a week focused on property, more than twice the time we spend at the gym (1.08 hours) or speaking with our parents (0.88 hours).

The performance of the residential property market over the past three years since the start of the COVID-19 pandemic has certainly given us plenty to talk about. The PropTrack Home Price Index shows that in the three years from early 2020 to late 2022, property values nationally soared 30%.

Most of us hold property for longer than three years – the median holding time is around nine years, according to CoreLogic. So how has property performed in that timeframe? CoreLogic says that between 2012 and 2022, values across Australia climbed 72%.

The upshot is that the right investment property can potentially deliver long term capital gains as well as ongoing rental income. There can potentially be other benefits along the way such as potential tax savings through negative gearing.

That said, buying an investment property often means taking out a substantial debt – an investment mortgage. So it’s a major financial commitment – one that calls for careful consideration of what’s involved. It may be prudent to consider suitably qualified professional advice.

Let’s take a look at how to buy an investment property.

The steps to buy an investment property

If you have previously purchased an owner occupied home, the process of buying an investment property works in much the same way, though with a few variations.

1. Set a buying budget 

• It’s a good idea to have a clear insight into how much you can spend before you start looking. A helpful step when establishing your buying budget could be to organise home loan pre-approval. This gives you a clear idea of your borrowing power, which can narrow down where you buy and the type of investment property you can afford.
• It’s also important to factor in the ongoing expenses of owning an investment property, such as insurance, rates, maintenance and any other fees, such as property management and body corporate fees. This may help to form a clearer understanding of what rental yield you will need to aim for (‘yield’ refers to the yearly rental income a property generates as a proportion of the property’s purchase price). It may help to get some suitably qualified financial advice.

2. Decide where to buy

• As an investor your choice of area, or the type of property to buy, is not limited by personal needs. So you’re free to broaden the scope of suburbs and properties you consider.
• That said, if you’re buying in an unfamiliar suburb, be sure to do plenty of research on property values, tenant demand and the growth prospects of the area.

3. Find a property

• There are lots of ways to locate a property that you might want to consider buying, such as scouring real estate websites yourself or hiring a buyer’s agent.
• When considering whether or not a property would be a good fit for your investing needs, you may want to consider such things as:
  • how much you will need to borrow to buy it
  • its rental yield
  • if the property needs any work to make it suitable for the rental market
  • if it is already tenanted
  • who manages the property and how much that costs
  • what conditions are in the contract
  • the age of the property.

4. Conduct pre-purchase checks

Once you have found a place you’d like to buy, it’s a good idea to arrange a pest and building inspection to be confident the property has no hidden nasties such as a termite infestation. Any problems could lead to unexpected repair bills and potential delays in being able to rent the property.

5. Negotiate, exchange, settle

• From there it’s a process of negotiating on price with the seller, signing and exchanging the contract of sale, and paying a deposit.
• Following the settlement process, when the property is transferred from the seller’s name into yours, you’ll be handed the keys to the property, and can start advertising for a tenant (if there’s not one living there already).

What to consider when you buy an investment property

Let’s take a look at some of the main issues to be aware of when you buy an investment property.

Investment home loan rates tend to be higher

Interest rates on investment mortgages tend to be higher than owner occupied home loan rates. So be sure to shop around and compare investment loan rates with different lenders. Sure, the loan interest on a rental property may be tax deductible, but paying a high interest rate can lower the return on your investment.

Can your cashflow handle vacancy periods?

All properties generate ongoing costs, from council rates to building insurance and land tax, plus general repairs and maintenance. While rental income may pay for all or part of these costs, there could be times when the property is vacant. For example, you may decide to complete renovations, the property may require major repairs, or the place could sit empty between tenants.

It’s worth being confident that you can continue to pay the ongoing costs of an investment property including loan repayments, during those periods when you receive no rental income.

Do you plan to manage the property yourself?

There’s more to being a landlord than hanging up a ‘For Rent’ sign. Landlords face a range of legal responsibilities around the condition of the property, how bond money must be recorded and stored, and how frequently rent can be raised. You can choose to manage these aspects yourself. However, research indicates that around four out of five investors use a property manager, according to the Momentum Wealth Property Sentiment Report 2022.

Handing over the management of your rental property to a professional can free up your time, but it does come with costs. According to Localagentfinder.com.au, property management fees average around 7.5% nationally though they can be as high as 15% of weekly rent. Additional fees may be charged to secure a new tenant. Be sure to crunch the numbers to see how the cost of using a property manager impacts the cashflow and rent returns of your property.

Are you prepared to invest for the long term?

Buying an investment property comes with significant upfront expenses such as stamp duty and conveyancing fees. It can take time to recoup these costs through an increase in the property’s value. As a guide, CoreLogic found the average holding time for properties that resold for a profit in the September quarter of 2022 was 9.2 years.

This makes it important to decide how long you plan to hold onto an investment property for, and whether this fits with your plans for the future.

The pros and cons of buying an investment property

Understanding the pros and cons of a rental property can help you decide if it’s the right investment for you.

Potential pros of buying an investment property

Property can offer a variety of possible upsides including:

Property tends to be less volatile than other investments – like all investments, the property market moves in cycles of highs and lows. According to MoneySmart, as it takes time to sell a property, the market tends to be less volatile than other investments such as shares.

You can earn rental income – you will receive regular rental income while the property is tenanted, which helps to cover the costs of owning the property.

Opportunities for capital growth – a well-chosen property has the potential to rise in value over time.

Potential tax savings – many of the ongoing costs of owning a property can be offset against rental income, and any resulting loss can usually be claimed as a tax deduction against other income such as your regular wage or salary, according to the Australian Tax Office.

You have control of your property – unlike many other investments, you are in complete control of your property. You can even choose to renovate it as a way of adding value.

Cons of buying an investment property

Let’s take a look at some of the potential drawbacks of buying an investment property

Property comes with a variety of ongoing costs – the rent you receive may not cover all the costs associated with owning a rental property. This may mean relying on other sources of income to pay the bills.

Interest rates could rise – If you have a variable rate investment loan, an increase in interest rates could see your loan repayments rise.

The tax rules for property are complex – the rules around what can and can’t be claimed on tax with a rental property are complicated, and penalties can apply for getting it wrong, according to the ATO. It can be a good idea to seek professional advice.

You’re tying a lot of money up in one asset – if you need funds in an emergency, you can’t sell off a bedroom to raise extra cash.

The entry and exit costs are high – property comes with expensive upfront costs such as stamp duty and conveyancing, and when you decide to sell, you’re likely to pay agent’s commission.

Is buying an investment property a good idea?

Part of the appeal of property is that it is an asset most of us are familiar with – we know how it works, and it doesn’t require any specialist expertise.  This opens the door for many Australians to buy a rental property.

The key is to think through what’s involved, and be sure you can comfortably manage the financial commitment, to decide if buying an investment property can help you achieve your goals.

Cover image source: Leka Sergeeva/Shutterstock.com