Investment Property Mortgages

What Is An Investment Property?

Investment properties are dwellings that are not your primary place of residence. Instead, you would purchase an investment property to make a profit. The two primary categories of investment in real estate as an asset class are:

Rental Properties

Buy to let properties generate income when you charge tenants for rent. Rental property categories include:

• Residential: These kinds of rental properties are common. They are either free-standing homes, units, apartments, or townhouses. Your residential investment property is essentially someone else’s home.

• Commercial: These investment properties are larger and can take many forms, such as office buildings, retail spaces, or industrial warehouses. They are meant for commercial activity, such as business operations or storage.

• Mixed-Use: This category of investment properties is a combination of residential and commercial elements. For instance, you could have a ground-floor commercial space with apartments on the upper levels.

Resale Properties

Buying property that you intend to resell or flip is a short-term investment (obvs!). You would purchase a property, make improvements to it, and then sell it for a profit. The time frame for this profit-making strategy is usually one to three years and as such qualifies as a regular home loan in the eyes of the lender - albeit with different requirements for servicing and LVR as well as a different interest rate.

When you take out investment property home loans for resale properties, you would finance the purchase and any necessary renovations. After you sell the property, you would use the profits to repay the loan. Get in touch with our home loan specialists to discuss your investment goals.

How To Buy An Investment Property?

Buying an investment property is an exciting (and ideally extremely profitable) venture. However, it’s important to remember that an investment property is a long-term commitment. Still, you can easily go about the process when you have the seasoned experts of Berwick Mortgages by your side. Here’s a closer look at the stages involved in buying an investment property:

Stage 1: Choose Your Investment Property

Selecting the property that you intend to invest in must be your first goal. While you might have an idea of the property you want to buy for your investment venture, it pays to have several options that meet your standards. Consider these criteria in searching for investment property:

• Type of Property: Generally, you can choose between two types of property to buy as an investment. There are free-standing houses and apartment units. When choosing between these two types, you consider what your potential tenants prefer for their dwelling place. On the one hand, some people want to live in a house because it offers more privacy. On the other hand, others prefer an apartment unit because it is easier to maintain. Identify your target audience when choosing.

• Buy or Build: Do you want to buy an existing house or unit, or would you prefer to build one from scratch? Although the former can help you save on building expenses, the latter gives you freedom in designing the final project. Your loan type and the amount will also depend on this factor. Be sure to consider the advantages of each option when getting an investment property.

• Property Location: Be sure to choose a strategic location for your investment property. It should be accessible to public transport and commercial establishments. Your potential tenants will also want the property to be in a safe neighbourhood. When picking a location, consider its proximity to schools and hospitals to give your tenants the confidence in renting your place.

Stage 2: Determine How Much You Can Afford

Once you have chosen your investment property, your next step is to secure your budget. With a price range to keep you grounded, you can proceed to look at properties that you can realistically obtain. Consider these factors to help you craft a budget:

• Who Is Buying? This is the same as going through the normal home loan application process. How much you can borrow will depend on whether you are buying the place through a trust or SMSF, how many people are involved in purchasing the investment property (if you're buying together with friends or family.) The basics of calculating serviceability are essentially the same. Lenders will calculate the loan amount on your income and assets as well as those of your partner or family member or whoever is buying the property with you.

• How Much Deposit Do You Have? Look at the price of the property and compare it with how much you can afford as a deposit. Insurance providers may charge you less if you put down a larger deposit because it minimises their risk. It also gets you a better interest rate on your investment property loan.

• How Much Do You Earn? Your income will also dictate how much you can afford to spend on an investment property. The lender will assess your current employment status and capacity to make repayments before approving your loan. Be sure to prepare all the relevant documents to substantiate your income claims. This is also analogous to the way a regular homes are assessed.

• What Are Your Monthly Expenses? Expect your lender to ask about your monthly expenses. They will use this information to determine whether you will have enough money to make repayments on your investment property loan. Track your current expenses using a budgeting app or a simple Excel spreadsheet.

• Can You Use Existing Home Equity To Buy An Investment Property? Using equity to buy investment property is an option if you already own a home. Essentially, you can refinance your mortgage and use the extra money to purchase another property.

Stage 3: Consider Extra Costs

There is more to the cost of the property that you will pay when getting a loan to finance it. Here are other costs commonly associated with investment property home loans:

• Property Stamp Duty: You must pay this state tax when transferring the ownership of a property. The amount will depend on the purchase price and the location of your investment property. In addition, you must make the payments within 30 days of the settlement date.

• Lenders Mortgage Insurance: You will incur this fee if you deposit less than 20% when getting an investment property home loan. The insurance protects the lender in case you default on your repayments.

• Security Fees: Depending on your lender, you may pay fees for valuation and conveyancing. Valuation is the process of determining the worth of the property using its location, features, and recent sales data. Conveyancing is the legal transfer of ownership from the seller to the buyer.

Stage 4: Get a Pre-Approval for Your Loan

After crafting your budget and knowing how much you can afford to spend on investment property, your next step is to get a pre-approval for your loan. This document from your lender will state the maximum amount that you can borrow. It will also detail the interest rate and highlight relevant loan terms.

Having a pre-approval for your loan will give you the peace of mind of knowing how much you can spend on your investment property without overstretching your finances. To get a pre-approval, most lenders will require the following:

• A copy of your ID

• Your last two payslips

• Bank statements for the past three months

• Proof of any other income, such as investments or rental income

• Recent utility bills

Pre-approval will be valid for four months. As such, be sure that the documentation you supply is up to date. Lenders will also conduct a fresh assessment of your financial situation before approving your loan. Let our mortgage experts at Berwick Mortgages review your situation and help you get the best possible deal on your investment property loan.

Stage 5: Apply for Your Investment Property Loan

After getting pre-approval, you can now apply for your investment property loan. When buying investment property in Berwick, you may go through a public auction or a private sale:

• Public Property Auction: You will face other interested buyers if you plan to buy an investment property through a public auction. The highest bidder will get the property. In this scenario, the entire process will happen quickly since you will pay the deposit on the spot.

• Private Property Sale: Most residential properties up for sale in Australia involve private offers. Property sellers may also give you a finance clause allowing you time to find a loan to buy an investment property before formalising your commitment (note: we're not lawyers - please get advice on this!!)