The first step to property investing is to think about why you want to invest.

Many people start their investing journey by looking for properties to buy without first clarifying the purpose of the investment. 

For most people, making money and building wealth will be the main reason for investing, but there are different goals and strategies, and different ways to invest to achieve the best result.

An investor looking for long-term capital gains may target different properties to someone who is looking for an immediate source of passive income. Similarly, a time-poor investor will have a different strategy to someone who is more hands-on.

Equally important is to understand your financial situation now, where you want to be in the future, and how property investing will play a part. 

To invest in property you will need capital, as well as an understanding of how to save money, increase income, reduce expenses and utilise debt and equity.

What should I research before investing?

The next step is research and education. Research can involve understanding what’s happening in the broader real estate market, including where different markets are in the property cycle, as well as factors that can affect the market including lending, population growth, employment, taxation and other economic factors.

Research can also involve looking at individual cities, regions, suburbs and neighbourhoods, and understanding the key metrics in these areas, including median sales and rental prices, yields, auction clearance rates, days on market and vacancy rates.

Education is an ongoing process throughout your investing journey. It not only involves investigating the different investing strategies, but also learning about effective cash and debt management, as well as tax implications of property investing. Building your knowledge in these areas gives you confidence to make informed investing decisions.

Once you have clarified your investing purpose and goals, understood your financial situation, thoroughly researched the market and educated yourself on the numerous aspects of property investing, and prepared a deposit to buy a property, you’ll be ready to invest. 

How much money do you need to buy an investment property?

The amount of money required to invest in property depends on many factors, including the price of the property you are targeting, the expected cash flow and whether it will be positively or negatively geared, as well as any equity you may already have in a property you already own, such as the family home.

To buy residential property, you typically need a 20 per cent deposit to secure a loan for the remainder of the purchase price. For a $500,000 property, the deposit would be $100,000. For a $1 million property, it would be $200,000.

It’s possible to invest with a deposit of less than 20 per cent, but you may need to pay lender’s mortgage insurance (LMI), an additional cost generally added to your total loan amount. LMI protects the lender in case you default on your loan and the sale price isn't enough to repay the whole loan amount.

You also need the income to support ongoing mortgage repayments. Ideally, this income comes from the rent from leasing the property, but in many cases there will be a shortfall between the rental income and minimum repayments, which will require you to contribute some money from your own pocket. You’ll need to have enough surplus income from your job or elsewhere to make up the shortfall.

Whether you’re an investor or owner-occupier, saving the initial deposit is usually the most challenging step when buying a home. If you are buying an investment as your first property, there is no escaping the fact that you will need to put in the hard work to save up the cash. If you’re in this situation and thinking about property investing, start saving now.

How to use equity to buy an investment property

If you already own a home, you may be in a position to invest sooner rather than later. Home owners can take advantage of any equity they have in their home to put towards a deposit for an investment property.

To work out how much equity you have in your home, deduct the value of your loan from the value of your property. The remainder is your equity.

You can also use Domain for Owners to find out what your home could be worth so you can better understand your financial position.

Home owners can utilise their equity without having to sell their home. The most common ways to do this are:

• increasing the size of the loan
• taking out a second loan on the property
• refinancing with a different lender.

Each option will increase both your bank balance and your loan amount, so it's important to remember that you are borrowing more money to put towards the deposit for the investment property. This also means you will be paying extra interest on the money used for the deposit, which shouldn't be overlooked when estimating cash flow.

There are several things to think about when considering this strategy. First, banks may be reluctant to lend more than 80 per cent of the value of the property in total. This is to minimise the chances of you end up owing more than the value of the property if the value falls.

This situation can be very problematic if you suddenly need to sell, as you will need to make up the balance yourself to repay the loan. For this reason, it's likely that you won't be able to access all the equity in your home.

It’s also worth thinking carefully about which lender you choose for the investment loan. If you choose the same lender as for your home, they may cross-securitise your loan. This is when the loan on the new property is secured against the value of your existing property. 

Cross-securitisation can be problematic. The main risk is if you default on the loan for the investment property. In this situation, the bank may have the ability to force the sale of not only the investment property, but also the home you live in, to recoup the cost of the loan.

Cross-securitisation also limits flexibility. If you sell one property, the bank may require that some of the proceeds are used to repay some of the loan balance for the other property to lower the loan-to-value ratio. Cross-securitisation also makes it more difficult to switch lenders or products to get a better deal.

What is the property cycle and how does it work?

You may have heard that property prices move in cycles, but what does that mean, and how can you use it to your advantage?

Historically, median prices across Australia tend to go up and down, with a general upwards trend in the long term. This up-and-down cycle can be divided into four phases, with an entire cycle lasting between seven and 10 years.

The Boom - The boom or growth phase is when prices are rising, slowly at first, and then rapidly. 

During this period, you’ll find everyone is talking about property. It’s easier to get a loan, interest rates are lower, and homes tend to sell faster, and for more than sellers expect. Lots of people, especially investors, start buying property, expecting prices to continue rising.

The Peak - This is when prices are at their highest, but it’s also when things start to change. Prices may have risen so much that buying a home becomes unaffordable for many people. At the same time, lots of people start selling their homes, hoping to get the best possible price. 

The Downturn - The peak leads to the next phase, which is also known as the correction. This is when prices start to decrease or growth remains flat, often because there are more sellers and less buyers. 

It can be harder to get a loan or borrow as much in this phase and if buyers can’t afford what sellers are asking, homes take longer to sell, and prices continue to fall.

At the bottom of the cycle, fewer people list their homes for sale, but there are still buyers looking for great deals. Eventually, low supply and rising demand leads to the next phase, the recovery.

The Recovery - This is when prices have remained low for long enough for people to feel confident to re-enter the market. As buyer sentiment improves, the market enters a boom period once again.

When should you buy?

It’s favourable to buy at the lowest point in the cycle, because prices have highest to rise, but the catch is that it’s often harder to borrow as much money at this time. It’s also difficult to pinpoint the exact bottom of the market until after it’s already happened, there may be limited choice with less properties for sale, and there may be a lot of negative sentiment in the market, which can cloud judgement. 

The most important thing to remember is that property should be a long-term investment. If you hold a property for 20 years instead of three or four years, it reduces any negative effects of buying when prices are at the peak of the cycle.

It’s also important to remember that different cities and states are usually at different points in the cycle. While one might be in a downturn, another might be experiencing a boom. This may make investing outside your home city a favourable option.

Source: domain.com