There are many things that you need to consider before investing in a property. You need to have a solid financial plan before rushing into any decision. Although the property market has some of the best buying opportunities, you need to ask yourself if you can handle all the responsibilities involved with your purchase. Or, are you financially stable enough to pass the requirements set by banks, lenders, or other providers of loans in Australia?
Aside from the financial responsibilities, you also need to think of factors that do not fall under your control. It may be tempting to take a chance when property values fall, due to the competitive price that allows you to earn more in the long run. However, real estate tends to change every once in a while. Are you really ready to take the risk?
5 Things to Consider Before Applying for a Loan in Australia to Buy a Property
As you know, properties do not come cheap. They are not something that you can buy in one go. You will most likely need a little bit of financial help from the bank or a lender. You will have to look for a suitable loan in Australia that matches your needs and a lender that will agree that you can afford a property investment.
Here are 5 things to consider before applying for a loan to invest in a property:
1. How much deposit do you have?
Keep in mind that the bigger your deposit, the less you need to borrow from a lender. You should also take note that the interest paid on an investment loan can be claimed as a tax deduction. So, investors often have less motivation than homeowners to stump up a large deposit.
In most cases, you may not even need to have a 20% deposit as most lenders will only require a 10% deposit or less. However, doing this will mean paying lenders mortgage insurance (LMI).
2. Is it possible for you to unlock the equity in your home?
This is applicable to you if you are a homeowner. If you are a homeowner, then you may not even be required to provide a cash deposit at all. You can use the equity built up in your home instead of a cash deposit. This allows you to use your cash savings for something else, such as a few renovations on the investment property.
3. How familiar are you with your cash flow?
Buying a property is going to take more from you than just the deposit. For example, you would be handling other purchase costs such as stamp duty and legal fees, as well as ongoing expenses such as rates, insurance, repairs and maintenance, and loan repayments.
If you are planning to put the property up for rent, then the rental income can help you cover part of the regular costs. You can use negative gearing to your advantage by claiming any annual loss on the property as a tax deduction. Keep in mind that you still have to be able to pay for some of the expenses that may arise. This is where knowing your cash flow comes in.
You can get an idea of how your cash flow works by adding up all your income, comparing it against the regular costs of owning your investment property, and adding some wiggle room in your budget for unexpected expenses, like repairs.
If your lender thinks that you can comfortably handle owning a rental property, then you will have higher chances of getting approved for a loan in Australia.
4. How does your income look?
Whether you are buying a rental property or simply investing in the real estate market, the property value is not always soaring high. You can experience periods of vacancy for your rental property and sometimes the real estate market is not doing well. This is when you will be needing to rely on your regular income to cover your expenses, including your repayments for your investment loan.
So, make sure that the lenders will like what they see when you submit your proof of income.
5. Does an investment property fit in your future plans?
Both residential and rental properties are considered as long-term investments. So you should be prepared to hold onto the property for at least five to seven years. Since it is not a short-term commitment, you should make sure that the property you are considering to buy fits in with your future plans.
Mistakes to Avoid When Buying an Investment Property
After answering the five questions above, do you still think that you are ready to buy an investment property? If your answer is yes, then read on. You still have so much to learn. Here are the most common mistakes that investors make that should avoid:
1. Thinking with your heart instead of your head.
The idea of buying a property may have come from an article you have read, or an experience of someone you know, or maybe an offer presented to you by a real estate agent. Regardless of where you got the idea, some hype is involved in your decision to invest in a property.
Most of the time, buying a residential or rental property is significantly affected by your emotions. Not much logic is involved since you are stuck in an idealistic concept where you own AND earn through a property. When you are investing, listening to your emotions is not a smart decision. Your emotions can cloud your judgement and lead to buying a bad property. You should always decide based on research, not based on emotions.
2. Not planning ahead.
This classic rule does not apply with just property investment, it applies to every single decision you make in life. If you fail to plan, you plan to fail. No matter how much you prepare for something, if you do not have any plan of attack, then you are setting out on a journey without a map. You are raising the chances of going the wrong way and getting lost. You need to set a goal, think of milestones and have a cohesive plan to get to where you want to be.
Here are the things that you should have in order to achieve financial freedom and be able to afford the property you want to invest in:
- Clear and realistic financial goals
- A timeline
- A portfolio of your progress
- Wealth creation plan for your property
- List of risks you should prepare for
3. Impatience.
Patience is the key to many things, but a lot of people do not seem to get this. If you want to be a property investor because you want to earn big money overnight, then you are in the wrong industry. Property is not a quick fix for your financial needs. In fact, at first, you will be adding to your monthly bills due to the repayments for the loan in Australia that you have applied for you to be able to afford the property.
You need to understand that seeking short term gains in real estate is more about speculation than strategic investing. Investing in property can give you financial stability if done right, but it will not happen overnight.
4. Not doing your research.
You do not need to be an expert to start investing in property. However, it pays to know the basics. Understanding the intricate details of property markets takes time. One or two seminars will not make you an expert on the matter right away. Knowing your local neighbourhood is different from understanding the investment fundamentals of your property market.
5. Investing in the wrong property.
This mistake can significantly affect your motivation to go on. Making the mistake of investing in the wrong property will definitely make a dent in your finances and your confidence.
Before applying for a loan in Australia and buying a property in your area, you need to make sure that you are choosing the right investment location. The investment location that you choose should be one that will outperform the averages.
You should also check if you are buying an investment-grade property. This means that the property can remain in continuous strong demand by owner-occupier and tenants in the future.
6. Having poor financial management skills.
When you are just starting out as a property investor, it is easy to give in to poor cash flow management. After all, you have just taken on a new financial responsibility in the form of a loan in Australia. It can take you a while before you get used to the additional amount that you need to take out of your monthly earnings. There will be some necessary changes in how you handle your finances. You should be prepared to adjust accordingly.
You can either sit down and do your budget or get in touch with a professional who knows about real estate investment. You must know what you’re getting into financially. It is also important that you are sure you can afford to hold onto any property you buy.
The Bottomline
As you can see, property investment is anything but simple. The financial responsibility that comes with it is not a joke either. So you should make sure that you get the best outcome for the property you choose to invest in. Thoroughly evaluate what kind of loan you should get to help you with your investment. Some people can get away with a short-term loan while others need loans with much longer terms.
The opinions expressed in the Blog are for general informational and entertainment purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.