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A Guide To Property Investment - Part 3: Financing An Investment Property

By Coposit
12/22/2023

Finding the right property to invest in can be difficult, but financing the initial costs is where the real challenge comes in. Making a down payment is a barrier to entry for many, especially first-time investors.

So let's break down the process and walk through how to finance the acquisition of an investment property step by step.

Financing an Investment Property

Your first step is to find out what you can afford to spend on an investment property.

Create a detailed budget plan so you can start your property search with a realistic figure in mind. Take the time to understand how much you can comfortably afford to repay, factoring in your everyday living expenses, existing debts, and other financial commitments.

A helpful tip is to contact the realtor or current landlord of the property you intend to invest in. Ask for a detailed list of the property costs, including maintenance, taxes, and local council rates.

How to Finance an Investment Property

Traditional Mortgage

Exploring lender options is a great place to start, by comparing offers and term rates to find the best for you. The types of mortgages that will be available to you depend on certain factors:

  • Credit score
  • Income
  • Assets
  • Employment history
  • Outstanding debt
  • Bank statements

The main upfront cost that isn’t covered by a traditional mortgage, is the down payment or deposit. Generally, you will need 20% of the property purchase price as your deposit.

Equity

Equity is the difference between the current market value of your property - and the remaining balance on your home loan.

If you already have an existing property, many property investors choose to borrow against the equity of their property to support their next purchase.

Equity can build up over time as you reduce your loan amount with principal and interest repayments. So, if you’ve had your property for a few years, chances are you may have built up some equity that you could put towards a new investment property.

Interest Only Loans

Interest-only loans are where, for a specified initial period, the borrower's payments are applied solely to the interest portion of the loan, not the principal.

This results in lower monthly payments during the interest-only term. Such arrangements are particularly attractive to property investors who anticipate selling a property within a short period. However, once the interest-only period expires, the borrower must start paying off the principal, which typically results in making higher repayments overall.

SMSF Loan

Some banks and lenders offer loans tailored for investors with an SMSF Loan (Self-Managed Superannuation Fund). This type of loan is known as a Limited Recourse Borrowing Arrangement (LRBA). Limited recourse borrowing means that if the loan defaults, the lender's rights are limited to the asset held in the SMSF trust and does not affect other held assets.

This can be a great benefit for investors who are looking to lease out a property until retirement, when they can legally move into it. If you choose this route, consider whether your SMSF will be able to maintain the loan repayments and fees over time.

How Many Investment Properties Can I Finance?

Technically, you can invest in as many as you want. Investment properties are an excellent way to build your passive income and your long-term wealth. However, the amount you can own will be determined by your finances, borrowed or otherwise.

Securing Your Finance

Let's talk about the next step in borrowing options - securing your finance and transferring it into an investment for properties in Australia.

Choosing a Fixed Or Variable Interest Rate

A fixed interest rate appeals to borrowers who value the predictability of set repayments and can afford to delay paying off the principal on their loan. The consistent repayment amounts help manage your investment property with budgeting and cash flow plans. If you expect interest rates to go up, low fixed rates are ideal for long-term properties with steady capital growth in prime locations.

A variable interest rate appeals to borrowers who want to tap into equity or pay off their loan sooner, or those who believe interest rates may be lower in the future. The downside is that the interest rate can increase due to external market factors. This means using a variable interest rate loan for a long-term property investment comes with a level of risk.

Personal Finances

If you have the option of using your own personal finances to invest in property, that's great. This is the safest option when making an investment in property, as there is no interest or repayment plan.

If you are looking to invest in property, contact us to find out more and ask our team about the option of investing in off-the-plan properties across Australia.

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