Frequently Asked Questions
THE RISKS OF INVESTING
1. What If Interest Rates Rise? +
The Reserve Bank of Australia (RBA) raises interest rates to curb inflation. In an inflationary period, rents often go up by more than usual which helps to compensate you for any effect on cash flow.
Some investors choose to lock in their interest rates beforehand. We can help investors decide whether fixing interest rates would suit their situation.
2. What If My Partner Doesn’t Want To Risk An Equity Mortgage On The Family Home? +
We aims to minimise risk. Our free information workshops explain this in more detail. We encourage both partners to attend so that you each understand and feel comfortable with your choices.
Our accredited finance brokers are readily available to assess your capacity to borrow safely for investing.
3. What If Negative Gearing Is Abolished? +
When negative gearing was abolished in the 1980s, rents sky-rocketed and unemployment in the building and allied industries soared. After 18 months, the Government re-introduced negative gearing and it’s doubtful it will be abolished again.
Although this topic is often revisited, it is well recognised that the government needs to encourage investors into the property market to stimulate housing construction and provide subsidised (negatively geared) rental accommodation.
4. Is There A ‘Good’ Or ‘Bad’ Time To Invest In Property? +
Throughout history there have always been ‘bad times’ to invest in property. Despite this, an analysis of property price growth over many years reveals that historically, prices generally rise between 2% – 4% above the prevailing inflation rate.
No one can predict future values, however history shows that property prices in Australia will double over a period of time. Viewed as a long term investment, quality property in selective locations overrides the short term “bad times”.
5. What If I Can’t Find A Tenant? +
It is important to buy investment property in good areas with low vacancy rate. We can help with your property selection.
6.Why Should I Borrow Money To Invest When I’ve Been Taught Not To? +
The wealthy get wealthier by ‘leveraging’ to buy assets that increase in value, so why shouldn’t we?
Borrowing to invest in appreciating assets (such as well-located property) is considered ‘good’ rather than ‘bad’ debt and provides legal tax minimisation benefits. It is much easier to create wealth using careful borrowing and investment strategies compared to saving your hard earned, after tax income.
7. What If I Can’t Work Or Lose My Job? +
The possibility of losing your job can create the fear that prevents you ever investing and getting ahead.
There are insurance options available that can replace your income if you stop work due to accident or illness.
Job losses from redundancy are often only short term. However, if this is a concern we can recommend strategies that may help you through such times.
8. How Will I Be Able To Hold My Investment Property? +
You should look for specific investments with good tenant demand and rental returns without overburdening expenses so that they are suitable for average income earners.
We can show you how to hold your investment properties without biting too much into your regular income. By setting up an appropriate finance structure, claiming your tax deductions and maximising your rents, your investment property could pay most, if not all, of the bills.
We can show you estimated cash flows on your selected property which helps you see the expected weekly out-of-pocket costs.
9. How Do I Know If The Price I Am Paying Is Fair Market Value? +
You should always do your research. This often involves obtaining an independent valuation on the property and pricing comparisons using RP Data (CoreLogic.
You should also insist on obtaining a copy of your bank’s valuation on the property when your loan is being assessed. This is normally part of the loan application process.
1. What Happens To Property Prices When Inflation Is Low? +
Historically, property prices appreciate between 2%-4% above inflation, regardless of whether it’s low or high.
We’ve found that a better indication of property prices is the mis-match between supply and demand in particular areas, along with infrastructure development in those locations.
2. Should I Avoid Older Properties? +
It depends on your strategy. We do not recommend older properties unless they are fully refurbished, of solid construction and in highly desirable locations. Older properties can have hidden traps leading to costly repairs and maintenance. They also have lower tax benefits – creating a drain on the investor’s back pocket.
Buying new has many advantages including peace of mind with lower maintenance costs. We’ve also found that newer properties attract better quality tenants and higher rents.
Should I Sell My Existing Non-Performing Property In Order To Get A Better One?
To start with, we’d suggest you look at ways to make your current property perform better. Selling a property can take time, depending on the current market and its location, but it needn’t hold you back from continuing your investment journey.
Our mortgage brokers will assess your current finance options and suggest how you could use your existing property to help fund your next purchase. Depending on your circumstances, you may find that holding your existing property is a better option.
3. Should I Buy A Property In Joint Names? +
You can buy property in partnership with another person either as Tenants in Common or as Joint Tenants. Joint Tenancy is most common when purchasing with a spouse in equal shares. Tenants in Common enables you to purchase in unequal shares.
Buying with a partner can increase your ability to borrow suitable funds and may even enable you to start investing sooner.
It can also help you claim tax deductions in a higher proportion for the higher income earner. Your Property Mentor can help you assess the benefit of different percentage ownership structures using our cash flow analysis software. We’d also recommend you obtain legal advice when considering this arrangement.
1. Why Is Research Important? +
Research plays an extremely valuable role. While researching the growth and development prospects of different locations, you should seek out suitable property that meets your very strict investing criteria.
By developing strong relationships with your local agents, you can negotiate great deals. You should look for properties with low vacancy rate and good capital growth prospect.
2. How Are Areas Chosen For Good Rentals And Capital Growth? +
You need research the rental market and target high-density areas with the lowest vacancy rates. Rental returns and property price growth is largely driven upwards in areas where demand exceeds supply.
You need understand the economic principles of supply and demand, avoiding areas where oversupply may stall, or even drive prices down. By following your set and established selection criteria, capital growth and rental increases can be optimised.
3. How Can You Be Sure That Price Growth Will Continue In Future? +
While no one can predict the future, historical trends can provide a good guide on how property prices react to different economic triggers.
By examining research from the Australian Bureau of Statistics, the Valuer General’s Department, the Ministry for Planning, Real Estate Institutes as well as monitoring other growth factors, we can be confident in the areas and properties. You should focus on cities with higher population and economic growth forecasts, and where prices are affordable to investors.
4. What If Property Prices Stagnate? +
During an economic recession property prices may stagnate for longer than usual, however the underlying demand caused by increasing population can apply pressure that eventually results in a property "boom" when the economy returns to more favourable times.
In a normal market, population increases in concentrated areas will push prices up. A proper research can pinpoint where this is most likely to happen and you should target those areas well before prices escalate.
Each city is a different market, so property prices will move through different stages of growth at any one time. By diversifying their property portfolio, many investors purchase properties in different states as they become "ripe for picking", increasing the prospect for growth in their portfolio value.
5. How Are Villas, Townhouses And Apartments Different To Houses? +
Purchasing higher density accommodation, such as townhouses or units, help investors into more desirable locations closer to city centres. These types of property usually have higher rental returns compared to house and land in similar locations.
Part of any good property investment strategy is to maximise tax deductions. Villas, townhouses and apartments don’t have a high land component in the overall cost, so depreciable tax deductions are greater, helping improve your cash flow. You cannot depreciate land, only the improvements made upon it.
Be aware that the land component of investment properties is subject to land tax when an investor’s properties (land value) in that state reach the tax threshold. This is an important consideration for investors wishing to build a portfolio with multiple properties.
1. My Bank Won’t Give Me An Investment Loan. What Do I Do? +
Every lender has different criteria to assess how much they’ll lend to customers. Our brokers are independent finance brokers and have access to around thirty different lenders. They can assess your finances and borrowing capacity and recommend the best lending product for you – before you need to apply for a loan.
By having a free Financial Wealth Check, you’ll get to know your realistic borrowing capacity for an investment property loan. Our broker can also advise if your current loans are performing.
This process is as easy as completing a 2 page form, and remains confidential between our broker and you. We will advise you if you don’t qualify for a loan yet, but can let you know what steps you can take to improve your borrowing ability.
When you are ready to purchase a property, the finance broker can help you through the formal loan application process – at no cost to you.
2. Do I Need A Cash Deposit For An Investment Property? +
If you don’t have a cash deposit for an investment property you can temporarily use the equity in your home for the 10% to 20% deposit plus 6% buying costs. When the value of your investment increases, you may be able to refinance your investment loan to repay the funds owed against your home.
3. How Do I Know If I Can Afford To Hold An Investment Property? +
The first step in starting an investment portfolio is to gain a good understanding of your financial situation and the likely costs to hold a typical property in your price range. Our suggested strategy is designed for people on average incomes (or above) but is self-paced and progresses as and when you can afford it.
We can help you assess the likely costs to buy and hold a property and broker can advise on your lending ability.
It’s important that you feel comfortable with the financial commitment before you begin investing.
4. With Interest-Only Loans, Will I Ever Own My Investment Properties? +
Investment property that grows in value is an ideal vehicle to increase your wealth. You don’t need to own them outright to reap the benefits of capital growth.
As the equity (the portion you own) in the investment property grows, you can use it to fund the deposit on additional properties. By taking advantage of the lower repayments on Interest Only loans, you are more able to fund new investments while building your portfolio. We’d suggest that you pay off your home loan and any personal loans which are not tax-deductible.
5. Why Hasn’t My Accountant Told Me All About Property Investing? +
Accountants must maintain their expertise in accounting and taxation affairs. Most don’t have time to keep across all the details of specific property investment strategies.
Property Club’s Property Mentors and Branch Managers have an extensive knowledge in all aspects of property investment and are happy to share this with you and your accountant. We do, however, recommend you discuss your investment plans with your accountant to ensure that it fits your overall financial situation.