Why buy an investment property?
Data from the ATO suggests that as many as one in five Australian households own an investment property. Investing in property can contribute to growing your wealth, and offer the potential for tax benefits.
The potential for capital growth
Over time, property can grow in value. This offers the potential for capital growth if you sell your property at a profit.
Recurring income for the future
Alongside capital growth, investing in property provides the potential for recurring income. If your investment is positively geared, your investment could provide supplementary income to support your lifestyle, both now and into retirement.
Property investment is a popular way to diversify your investment strategy. The tangibility of property assets attracts many investors who want to be more hands on with their investments.
Depending on the type of property you invest in, there may be tax benefits available to maximise your investment potential.
Using equity to buy an investment property
A popular way to invest in property is to access the equity in your existing home. The surge in house prices over recent decades means many Australian households could be sitting on sizable amounts of equity.
How much equity can you access?
As a general rule of thumb, usable equity is calculated by taking 80% of your property’s value minus the outstanding balance on your existing loan. This helps to avoid overcapitalisation and prevents you from having to take out additional mortgage insurance. Calculating your home’s usable equity can help you discern how much you can afford to pay for an investment property.
For example, if you have a home worth $1million and an outstanding home loan balance of $200,000, your equity is $800,000. Taking 80% of that as usable equity gives you $640,000 to play with.
Increase (top up) your existing home loan
Depending on the type of home loan you have on your existing property, you may be able to access a home loan top up to release the funds to purchase an investment property. The effectiveness of this structure will depend on how much usable equity you have available, and what type of investment property you want to purchase. It can mean releasing a cash sum from your existing home’s equity, that allows you to purchase an investment property outright, without the need to take on another loan. Alternatively, you may release enough to put down a deposit on an investment property, and take out a second loan for the rest.
Some property investors choose to co-collateralise (or cross-collateralise) their existing home and their investment property within one loan. What this means is the first property is secured against the second property, and vice versa.
Considerations when using equity to buy an investment property
However you choose to access your home’s equity, be sure you can afford to take on higher repayments than you’re used to. Consider your capacity to take on additional liabilities, and prepare a contingency plan if you experience a bump in the road.
It’s also important to look ahead to your retirement plans. What sounds like a great idea now may not be suitable for the lifestyle you plan to adopt in retirement.
Property investing: things to remember
While property investment can have many benefits, it’s important to consider the personal and financial responsibilities associated with this type of asset.
- Your investment property will become someone else’s home. It’s important to remember your responsibilities to arrange for problems to be fixed when they arise, and to keep the property maintained to an appropriate standard. A property manager can help you maintain your obligations, but their fee needs to be factored into your investment return calculations.
- The value of your property will fluctuate in line with property cycles and external forces that impact demand. Maintain a long term approach to property investment in order to manage your risk.
- Property as an asset is less liquid than shares or bonds. The sale process can be costly and values can rise and fall over much longer periods, making it harder to liquidate. Consider your future plans and broader financial capacity when deciding whether property investment is right for you.
Any advice provided in this article is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation. Please read the applicable product disclosure statement(s) on our website before acquiring any product.