For many people, the thought of investment properties can be a very corporate and intimidating idea. But, anyone can do it, even if you are a first home buyer! It can be an exciting time starting your investment journey to help secure your financial future.
There are a few ways you can go into the investment property market.
- Use your existing home as the property
- Build a new home as the property
So why build with us?
Here at Move Homes we do a lot more than just your average home builder. Thanks to our parent company, we have an investment division that allows a broader range of opportunities for us and our clients. The Prime Group have been running for over 50 years and own a diverse group of property companies – one being Prime Property Investment.
So where does Move Homes come in? Well if you chose to start your investment journey with us, Move Homes can not only build that property but guide you in the process and optimise the best return from it.
Where to begin?
If you are a first home buyer, eligible for the First Home Owners Grant, there are a few things to understand before starting the investment journey.
In order to receive the FHOG, a condition you must meet is that you live in your new home for a minimum of 6 months. Once this condition has been met, you can then look into the investment side of things. Depending on what your plans are, you could even start your new build during that 6 months.
If you are already a home owner and you are either:
- looking to build an investment property,
- going to use your existing home as an investment property,
- or haven’t even thought about investment properties, but are wanting to sell your own home before you build a new home for yourself
There are a few ways to go about the investment journey.
Firstly, if you are a home owner wanting to sell your home before building – without the thought of investment properties – there can be a huge opportunity waiting for you. Instead of selling you could rent out your property and turn it into an investment property. Not only can you use the equity in your home towards your new build, you can use the rental income towards your borrowing capacity. Now wouldn’t that be a whole weight lifted off your shoulders?
If you are looking to build your investment property, you can use the equity in your home towards your new home. And if you are using your existing home as your investment property, then you can use your rental income towards your borrowing capacity for you new build.
What is equity?
Equity is the difference between the total amount of assets by the total amount of liabilities. In terms of the equity in your home, it is your home’s current value minus what you still owe on your mortgage. For example, if your home has a market value today of $400,000 and your existing mortgage balance is $180,000; you have $220,000 of equity in your home.
How to use the equity in your home?
When starting the loan process, the lender will usually lend you 80% of the value of your home – this is considered usable equity. Because the lender is giving you money against the value of your home, they won’t lend the full amount. This is in case there is a price dip – they do not want an outstanding loan that’s worth more than your property.
A simple way to do this is the “rule of four”. Using the above example, if your market value is $400,000, 80% of that value is $320,000, minus the mortgage balance of $180,000 would equal $140,000. So you would simply multiply the usable equity by four (4 x $140,000 = $560,000). Therefore, you would be able to borrow $560,000.
Tips:
Even if you have plenty of equity, it’s not always a given that you can borrow against it. The lender will take into account several factors such as your income, your age, how many kids you have, and any additional debts.
It is always best to have extra funds in case things don’t go to plan. If you don’t have any funds outside your home equity, then it’s risky to use every last cent of your usable equity to invest in property.
Building a new home as an investment property is a big benefit – as many people are looking for new homes to live in rather than old outdated homes.
Before you decide which strategy is best for you, talk to a professional. A financial adviser or an accountant is a good place to start.
The breakdown:
Pros
• The property market is more stable than the other markets. Investment property generates fixed returns to the investors.
• Income is more certain because you receive constant rental payment from the tenants. In the case that the rental income is higher than the mortgage repayment, you do not need to put any extra funds to pay off the loan. You may also have surplus funds to cover any property costs incurred.
• If you purchase the property in a good location, the property value will increase and you can generate more profit.
• Any tax associated with the expenses paid on the investment property can be claimed back at the end of the financial year. These being: property maintenance, council rates, and fees charged by managing agent.
• You can also use the existing equity in the property to get another loan or to purchase another investment property
Cons
• The initial costs to purchase an investment property are normally very high.
• After you purchase the property, you may not be able to rent it out straight away. You will need to spend some time to find the tenants. If this is the case, you may need to pay extra funds to cover all the expenses, such as mortgage repayments or property maintenance.
• The most common case is that your tenants move out after they finish contract, it normally takes some time to find another tenants – causing a short fall in income. You may also need to cover difference when the rental income is less than the repayments on your mortgage.
• Property value can increase but it can also decrease depending on the market. Especially during the financial crisis, most investors face financial difficulty. Due to spending all their funds in the investment property and then not able to sell or selling at a lower price.
Not sure where to start?
Our finance team have access to a range of home loans and products to suit your needs.
