Creating wealth through property
Property is considered an excellent method of creating wealth, when used as a long-term investment strategy. Historically, house prices provide a steady return to investors in the form of capital growth as property prices rise. With a range of investment loans available, smart property investment can be an ideal wealth creation vehicle.
Finding the right investment property
In order to create wealth through property investment you need to make smart choices on your property purchase. Some rules of thumb for choosing investment property include:
- Look for the right location – your property should be in an area where it is likely to be well-tenanted and/or experience price growth.
- Investigate infrastructure – look for a property which includes or has planned good roads and public transport in and out of the area, schools, shops cafes and restaurants, and sporting facilities.
- Pick the right style of property – target properties that suit the sort of people who live in the area, or one that can be renovated to meet the right needs with a minimum outlay. If you’re looking to invest in the inner-city market, search for modern, low-maintenance apartments. Similarly, houses with big yards are suitable when targeting families.
- Do your research – good research is the best way to find a bargain. Look for things like planned developments, upgrades of main streets/shopping districts, recent resource discoveries and suburbs adjoining soon-to-be completed highways, freeways, major roads or improved public transport, all of which make the commute into work more feasible.
Using your equity
There are a number of methods for using the equity in existing properties to help finance your investment property purchase.
First-time investors often use the equity in their principal place of residence (PPR) as additional security for their investment purchase. This increases the amount you can borrow and decreases the size of the deposit you require.
The use of two or more properties to secure a single loan (in this case the PPR and the investment property) is called cross-collateralisation. Advantages include:
- Increased borrowing power
- Higher Loan to Value Ratio
- Less paperwork
- Only one set of fees & charges
Things to consider before using cross-collateralisation to secure your investment purchase include: if something goes wrong, your lender may have the right to sell whichever property they want to recoup their costs, or even all of the properties securing the loan; it can become quite complicated to sort out your finances should you wish to sell one of the properties securing the loan; adding additional properties to your portfolio may require revaluations of all existing properties; refinancing can become expensive.
Line of credit home loans are often used by investors to secure the purchase of multiple properties, or you may use a standard variable or fixed home loan.
An alternative to cross-collateralisation is to purchase multiple investment properties using completely separate, stand-alone loans for each property – and even different lenders. Instead of using your PPR as security, you instead take out an equity loan against the balance and use this as part of your deposit, or even a second mortgage on the property. These methods are often employed by more experienced investors.
To read more about what home loans are available for investment, read our section on loans for investing.
It’s essential to discuss your investment options with your mortgage broker, accountant and financial planner to ensure you achieve the best possible tax and financial outcome.
Property Investment – Golden Rules
Rental returns aren’t the only opportunity to maximise property investments. There are a few golden rules to getting the most out of the borrowing side of your property investments.
- Make sure you review your property investment loans regularly to ensure you are on the best deal available. Over the course of a long-term property investment plan, the type of loans available and your situation may change dramatically.
- Be disciplined about the kinds of add-ons you pay for with your investment loan. Only get features and benefits you will really use. They all cost you money.
- Do the math and change loans if there is a long term benefit. Even though the costs can add up to anywhere from hundreds to thousands of dollars, changing to a more sensible structure or lower interest rate now may actually save you quite a bit more over a long investment period. With the help of a good mortgage broker, you won’t even need to do most of the work.
The extra money you save or earn because of the change can help you to expand your property portfolio, undertake redevelopment projects, take advantage of the tax benefits of paying your interest in advance, finance renovations on your home, or even top up your superannuation.
Want more information on property wealth creation
For more information on investment finance or the loan that is in your best interest, talk to your local Loan Market mortgage broker or call us at any time on 0508 722 205 (+64 9 526 0122).