A Beginners Guide To Property Investing

There is so much to dissect and understand when it comes to the property market, especially as an investor. It’s a totally different ballpark, with new terminology, different types of loans, and rental yields to understand. As property aficionados, we have decided to help new investors with an introductory piece on property investing. In the article, we will be helping investors with where to begin. From research to understanding common lingo we’re here to help.

The property market is currently hot in Australia. There’s a high auction clearance rate in almost every state and a case of FOMO (Fear Of Missing Out) that’s driving up the prices. It’s a simple case of economics 101, price is dependant on supply and demand, and when supply is low and demand is high, price is high. With the current state of the market, many investors have returned after going cold during 2020. Over the past 6 months, investor lending has grown by 70%. So, if you’re thinking now is a great time to invest, read on.

Where to start with property investing?

In order to understand the property market and where to invest, research is key. This will mean researching states, cities, suburbs, and regional areas to understand the growth patterns and current median prices. You will need to look at property clearance rates, demand, supply, rental yield, days on the market, and more importantly vacancy rates. 

From this, you should be able to get a good understanding of areas that suit your budget. 

Commercial Vs Residential Investing 

Whilst you are doing some of that very important research, you will probably find that there isn’t just domestic property that you can invest in, there is also commercial real estate. Let’s begin by defining the difference. Commercial property is shops, warehouses, or offices as opposed to residential property which is homes, townhouses, and apartments.

There are many considerable differences between the two. Firstly, commercial property has a higher rental yield of around 5-10% whereas domestic has around 3-5%. There is a higher barrier to entry for the commercial market due to the bank’s approval criteria. Banks usually require a higher deposit or more equity, and the interest rates on commercial loans are usually higher. This is due to the fact that whilst rental contracts have a tendency to be long term, 3-10 years, they do have a higher risk.

Let’s take retail as an example, many stores have now migrated to online-only, defuncting the need for a physical store, you’ve probably noticed many vacated retail shopfronts in popular shopping strips due to this. Another factor, or consideration, is also the lingering of lockdowns due to covid, many businesses have shut for long periods of time, making having a physical presence and paying continued rent unsustainable.

There are positives to commercial investing, otherwise, it wouldn’t be such a popular choice. These are; having long-term tenants, higher rental yield, and the tenants usually pay all the outgoings such as rates, taxes, and insurance. 

Factors To Consider When Choosing Property

First and foremost is the location. Once you have done some research and determined what suburbs are an appropriate investment, you’ll need to understand the suburb and its profile. This means the demographic that lives there (are there many renters?) and what amenities are located here. 

Consider a property that is close to the below and ask these questions?

How to use the equity in your property to invest.

If you currently own or have a mortgage on a property, you can utilise this asset and borrow with the equity, meaning you may be able to invest sooner. Equity is how much your property is now worth minus the loan amount. Banks may not let you use all the available equity, depending on the risk, however, it’s a great way to harness your current asset and build your property portfolio. 

Ways in which you can utilise the equity in your home:

• Increase the size of your loan
• Refinance your current loan
• Take out a second mortgage

Whilst using equity is a great way to build your portfolio, it does also mean there is a large loan at bay. You need to ensure that if your investment property is unoccupied, you can cover the minimum loan repayments. Otherwise, you may be at risk of defaulting which can cause major issues.

Issues with defAulting

If you default on a loan and you have a cross securitised loan with a bank, in order for them to recoup the losses, they may occupy your first property and sell that to cover the costs of your second loan. So, always do your due diligence and understand the implications of utilising your equity and the types of loans you are engaging with. 

Terminology and lingo

Capital Gains 

Capital Gains are any profit acquired from the sale of an asset, this can include property, shares and bonds. This can also be a capital loss if you sell an asset for less than the purchase price. Capital gains have a tax that needs to be paid to the government. For more information visit the ATO: https://www.ato.gov.au/general/capital-gains-tax/ 

Negative Gearing 

You’ve probably heard about this term but you may not know what it actually is. Negative Gearing is when your rental return is less than your interest repayments and any other expenses you have put into your property. Okay so now you’re probably wondering why that would ever be a good thing? I’m paying all this money for a rental property and not making any money from it. Well, that’s not entirely the case, see when you negatively gear your property, any rental losses you incur, during that financial year, can actually be offset by another form of income, such as your salary. Which means you’re reducing the amount of tax you’re paying. 

Positive Gearing

Positive Gearing is the opposite, whereby you are making a profitable income from your investment property. Meaning that your rent is covering the mortgage repayments and any property expenses such as; council rates or property maintenance. 

Rental Expenses and Tax Claims 

Rental expenditure and some portion of your interest repayments may be eligible to be claimed at tax time. If you’re renting out the property and need to make amendments or fix any issues, they may be claimable with a receipt and ABN number. For more information visit the ATO website: https://www.ato.gov.au/Forms/Rental-properties-2021/?page=5

Property Equity

If you’ve owned a home for a few years, will have undoubtedly built up some equity. Equity is the property value minus the amount of money you owe on your loan. You can use this amount as a deposit to finance an investment property. 

Incentives

The government and developers offer a range of monetary incentives. These can range from a % off the property price to stamp duty savings. Do your due diligence to understand the various incentives and how they can possibly help you.

Cross securitisation

Is when you take out a second loan based on the first, with the same bank.

We hope this is given you a great foundation to start your investor journey. If you’re thinking of an apartment, well we have some perfect options available in Oakleigh, Woodlands, Burwood, and Carnegie or you can call our sales team on 1800 267 687.

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