Investment Property
Take your next step onto the property ladder
Investment properties are a great way to grow your wealth and earn passive income. There are constant changes to the market for investment property purchases and policies that impact your ability to obtain lending. On this page we give you the information you need to understand some factors of the investment property process. Contact us for more.
Investment Benefits
Equity
Loan Structure
Lender Options
Investment Property Benefits
An investment property may not suit your goals, but here are some of the benefits to consider if you're thinking about it.
Rental Income
If you purchase an investment property, a big driving factor is having someone rent it from you. This rent can help cover some of the costs associated with owning the investment property. When the rent coming in outweighs the outgoing costs, this is referred to as a positively geared property. A negatively geared property is when you need to input extra funds into the cost of the property and this is often the case when first purchasing an investment property. When interest rates fall the cost of loan repayments decreases so your cashflow improves. For an example a principal & interest loan of $400,000 over a 30 year term and with a 5% interest rate is roughly $500 per week. If you make interest only payments this drops to around $385. So it would require a $500 per week rent to offset this principal & interest cost or a surplus of around $115 per week on an interest only basis. When rates rise, this cost increases so it is worth considering your budget long term. It can be worth speaking with an accountant around any tax advice including if your lending can be used to offset your rental income.
Equity Gained
Over a long term a large benefit of investment property purchases has been the capital gained. This refers to the value of the property increasing over time which is unrealised until the sale. But given there is no increase in lending, this gain in property value provides you with more equity to leverage. At 70%, every $100,000 increase in lending provides you with another $70,000 in leverage equity which can be used towards another purchase if the aim is to grow a portfolio of properties. When considering selling investment properties it is worth checking tax implications around the Brightline test etc as these can change often, especially with changes in government.
Getting Your Children on the Property Ladder
Sometimes the benefits of an investment property aren't strictly financial. A common driver of investment properties is parents helping their kids onto the property ladder.. This can either be in the form of joint ownership where the kids live in the property but you own it with them, or where you purchase the property before they are ready to purchase but to make sure the property market doesn't outpace them. Rising property prices can be great for those with properties but for those trying to get onto the ladder it can mean the goal posts keep getting pushed back.
Equity
When thinking about purchasing an investment property, considering your equity position is a great place to start. This may be in the form of savings held but is commonly utilising the equity in existing property. Below will run through some useful factors when reviewing your equity position and what this means for your options.
Standard Investment Property LVR
Purchasing an investment property requires an LVR of 70% under todays policy settings. That means you need to supply the remaining 30% personally. This can consist of equity in an existing property, personal funds you have available or a combination of both.
Exemption Property LVR
There are exemptions put in place to incentivise certain factors in the market. This means that lenders are able to go outside of standard restrictions if the rules of the exemption are met. A good example of this is an LVR exemption around new build properties. The goal of this is to encourage new housing to be built, as apposed to purchasing existing properties which doesn't add to new housing supply. For you this means investment properties which only require a 20% deposit or equity. Some banks will have loan options specifically tailored to this so its good to check your options. A new build is described as meeting one of the following;
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A house and Land package
A turnkey purchase
A house built within the last 6 months being sold directly from the developer
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Using Your Existing Equity
Whether you have an owner occupied property or a large portfolio of rentals, if there is enough equity this can be leveraged to purchase another property. There are other factors to the assessment but this is a good starting point. Property values change in line with the market and most lenders use an internal value system to decide what your property is worth. There are other ways to evidence your property value which can open up your options. Talking to an adviser can help see how much equity you have available to purchase another property.
Some Handy Calculations
Here's some calculations to check your equity status. An adviser can help you run through this further.
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Testing the equity in your owner occupied property. Typically you can increase your loan amount up to 80%
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House Value * 80% = Max Lending
Max Lending - Current Lending = Available Equity
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Once you know what your equity position is or how much of your own funds you have available to put towards a purchase you can find your maximum purchase price.
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Available Equity / 70% = Maximum Standard Property Purchase
or
Available Equity / 80% = Maximum Exemption Property Purchase
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Note that these LVR figures are subject to change.
Loan Structure
There are a number of different strategies around investment properties to get the most out of your investment. Below are a few simple ones to get you thinking about what options might be out there.
Interest Only
To make your cashflow easier to manage interest only periods are commonly used when purchasing investment properties. From the assessment side of things it shortens the loan term so depending on your servicing position, there may not be room. If a 5 year interest only term is included on a 30 year loan term, then you're repaying the loan over the remaining 25 years. However, for your budget this keeps costs down over the interest only term and may work in with the timeframe you expect to hold onto the investment. There may be options for extended interest only periods out to 10 years, or the option to roll over interest only periods, or even moving to another lender to get renewed interest only terms. If you decide to you use this strategy you should consider how long you expect to hold the property and your 'exit strategy' to repay the lending.
Owner Occupied Strategy
Tax Considerations
When considering any loan strategy, consulting with an accountant can help you get a professional opinion on how to best structure your lending. As advisers we can work with your accountant to put a strategy in place that suits your goals and aligns with your accountants tax advice. The tax policies are always subject to change so it is best to check with an accountant to get up to date advice.
Lender Options
Whether it is a main bank or a non bank, there are a number of options for your lending. Lending policy varies between these options, so where one bank has said no another may be willing to get what you need. One banks products may suit your scenario more than another so working with an adviser gets you access to multiple options so you're picking the right lending solution.
Assessment Criteria
Banks have their own internal assessment criteria which includes how they look at rental income, how they assess expenses and lending, or what their LVR limits are. LVR limits can be an important factor and the system that banks use to decide what properties are worth can vary, so one may limit your eligible lending more than another.
Exemptions
The Reserve Bank sets lending exemptions but banks have their own policies of how they wish to assess lending. Some banks will have loan products specially catered for this type of lending which can make it more cost effective than other options.
Restructure
When you are looking to use equity to purchase a new investment property, this can be a good time to consider a restructure of your current lending. Whether that means setting things up to align with a loan strategy or moving things around to take some pressure off your regular repayments. This restructure can be done in the same application and can be with your existing lender or by moving to another lender in order to take advantage of a cash offer and other incentives.
Split Banking
Just as the saying about diversifying your investment goes, the same can be said for diversifying your lenders. Not keeping all your properties with one lender can limit some liability and can be a useful way to keep things separate. This isn't for everyone, if you prefer simplicity in managing your lending and does have its draw backs, including having equity scattered across banks.