There are several factors you have to take into account in investment property financing, and these go beyond getting the lowest interest rates. Here are the top five factors to consider:
Create an investment plan. It is a great tool in mapping out calculations of the cash flow and depreciation schedules. It will also let you know about the number of properties that you can purchase in a certain period of time. An investment plan will likewise give you an idea of the loan type, level of gearing, as well as the costs and tax concerns that you are going to deal with.
Understand the Lenders Mortgage Insurance (LMI). LMI is an insurance that is payable to a lender for securities which have less than 20% equity. The insurance premiums are calculated on the loan amount you borrow against the property, the more equity you have the cheaper the premium is. By paying lenders mortgage insurance this allows you to have less than 20% deposit on a property. If you do need to take out a loan with LMI, ensure that your mortgage broker gets numerous quotes from different lenders, as all lenders have different LMI rates and conditions.
Choose the right loan package. An investor will most likely borrow funds to purchase properties, and there are several elements to consider when it comes to selecting the right loan. For instance, you may choose interest-only over principal repayments. You also need to choose the type of loan. It can be fixed-rate, variable, split between the two or a line of credit.
A line of credit is very useful in managing the cash flow of your investment property. However, you need to be careful when drawing on a line of credit as you can draw down on your unused credit very easily and if you don’t repay this money then it may in fact impact your profits once you think about selling the property.
Know the costs involved. These include:
- Purchasing costs (incurred when buying a property) – insurance, stamp duty, registration of title, surveys and inspections, mortgage registration fees, legal and valuation fees, commission of the real estate agent, etc.
- Ongoing costs (incurred after buying a property) – interest repayments, body corporate fees, bank account-keeping fees, lease fees, land tax, maintenance and repairs, utility fees, security costs, pest control, etc.
- Tax – determine the tax deductions, capital costs, and revenue costs. You also need to know the depreciation schedules since newer investment properties tend to have greater depreciation value. To gain a better understanding of this you can consult the quantity surveyors for the schedules or check the Australian Taxation Office (ATO) website.
Find a good financier/mortgage broker. Investment property financing is all a game of numbers, and while it is important to get the best loan, having a good investor-lender partnership is just as important. A good mortgage broker will have an understanding of your financial plan and position. They will be able to guide you through the entire process, from calculations on interest rates and payments to making sure your investment goals are achieved. Having a good relationship with your mortgage broker will eventually help you save a lot.
Whether you are a first-time investor or someone who intends to further diversify their investment portfolio, it is essential to get property financing right from the very beginning to ensure success and minimise problems in the long run. Launch Finance have a team of expert brokers who can assist with your investment goals and ensure you can access the best finance options available to you on the market.
Written by Duncan McKinnon, Finance Manager, Launch Finance.