Steps to Buying an Investment Property

Buying an investment property can be an excellent way to create wealth. But, like any investment, doing your research before you take the plunge could save you thousands.

You need the right loan to maximise your investment returns. These six steps will prepare you buy an investment property with confidence.

Step 1: Find out how much you can borrow

Your borrowing power will give you a good idea of how much you can borrow to purchase a property and will help you narrow down the properties you’re interested in.

Your borrowing power will vary between banks and lenders because they use different methods to assess your capacity and have different lending criteria.

As a guideline, when determining how much you can borrow banks and lenders will look at:

• Credit card limits
• Income and types of income (whether you are a casual, contract or full-time employee)
• The size of the loan compared to the property value
• Number of dependants and their situation
• Type of loan
• General living expenses
• Existing asset position (including the size of your deposit)

Online calculators only give you an indicative figure – a mortgage broker can give you an exact figure and will know which lender can maximise your borrowing power.

Step 2: Calculate your loan and purchase costs

You’ll generally need about 5-10% deposit for an investment property purchase. If you already have property, you might be able to use your equity to cover more of the deposit. The lending criteria for deposits differs between lenders and a Loan Market mortgage broker will help you identify which lender will best suit your needs.

In addition to your deposit, you will need to consider these purchasing costs:

• Loan application fee
• Valuation fees
• Stamp duty and other statutory government charges
• Conveyancing and legal fees
• Lenders Mortgage Insurance (LMI) if you’re borrowing more than 80% of the property value.

Step 3: Look at your investment loan options

There are a range of property investment loans available to suit just about any investment strategy. Property investment loans aren’t too different from other home loans. You’ll need to compare rates, features, fees and charges.

Your common loan options for property investment include:

• Line of Credit Loans if you already own a property. You can tap into the existing equity you’ve built up in your existing property to use towards a deposit for your investment property.
• Interest Only Loans if you’re focused on achieving capital growth in the short to medium term. These often go hand in hand with negative gearing.

Step 4: Get pre-approved

Get a head start on other buyers and have your investment loan pre-approved. It’ll help you shop realistically within your budget and give you the confidence to bid at an auction.

A formal pre-approval works the same way as a formal loan application, except without the security details. A formal pre-approval is different to using an online calculator to work out how much you can borrow. With a formal pre-approval, your lender assesses your income, expenditure, assets and liabilities to work out how much you can borrow.

Be wary of any pre-approval that has many conditions attached to it. A Loan Market mortgage broker can arrange you a formal pre-approval for you quickly.

Step 5: Find your property

You might choose to invest in residential property, commercial property, or even a holiday rental property, depending on your needs and goals. When choosing your investment property it’s a good idea to consider:

1. Location: is the property in a well-tenanted area or likely to experience property price growth?
2. Demographics: is the property suitable for the type of tenants in the area, e.g. low-maintenance apartments for young professionals?
3. Infrastructure: is there appropriate infrastructure in place, such as transport, shops, cafes and schools?
4. Development: is there any development planned for the area that may improve existing infrastructure, leading to possible improvements in tenancy rates or price growth?

Before you enter into negotiations for a specific property, find out:

• Has it been rented before?
• How much rent was paid?
• Were any vacancy periods?
• How long it was vacant for, and why?

It’s a good idea to organise a property management service, if you haven’t already as part of the purchasing process.

Step 6: Buying your Investment Property

Make sure you conduct building and pest inspections. If you’re bidding at auction you’ll need to do these before auction day.

Check the contract of sale for conditions and inclusions. Again, have your solicitor check the contract of sale before making a bid.

Make an offer or bid at auction. Don’t forget you’ll need to pay a deposit if your offer or bid is accepted. Be prepared to cover at least 5-10% of the purchase price.

Let your mortgage broker know you’ve found your property. They’ll finalise your investment loan. If you have loan pre-approval, full loan approval may take only a few days. Once your loan has been approved, you’ll receive a formal Letter of Offer to sign.

Settlement of your loan will then get under-way, starting with the receipt of your loan documents. You’ll need to forward these to your solicitor, who’ll liaise with your lender to schedule the settlement date. A settlement time frame is set out in the contract of sale. Your first loan repayment will usually be due one month after settlement.

Don’t forget to organise insurance, such as building and landlord protection. Loan Market Concierge will give you 30 days free home and contents insurance and help you with utility connections. You may also want to organise a property management service.