Key points/summary

If you’re looking at buying investment property, ask yourself:

  1. Do I have an investment strategy?
  2. How long do I want to own an investment property?
  3. Is capital gain or rental yield more important to me?
  4. How much can I borrow?
  5. What is my budget?

Buying an investment property should be an exciting step towards financial freedom. But unlike buying your dream home - one that you will live in and enjoy every day - an investment property is all about delivering a return, whether thats in yield (annual rental income versus costs) or capital growth (how much it increases in value from the time of purchase over a set period of time), or both.

If you're starting out on your property investment journey, or even adding to an existing portfolio of properties, you can set yourself up for greater success by asking yourself these five important questions.

1. Do I have an investment strategy?

It sounds obvious, but having a strategy and a set of clear goals for your investment will guide you towards the right property and the right investment loan. Consider your overarching wealth accumulation goals. What do you see as the key financial milestones in your life and when will they occur? How could an investment property help you achieve these goals? 

2. How long do I want to own an investment property? 

Your wealth goals will help determine how long you are looking to hold an investment property for and therefore when you intend to realise its value. Are you hoping to build a portfolio of properties to provide passive income when you retire in 20 years’ time? Are you wanting to build a nest egg for your childrens school fees in eight years? Short or long term, your wealth goals are central your strategy, and provide the foundation for your investment plan. 

3. Is capital gain or rental yield more important to me? 

Understanding what you want to achieve financially, both in the short and long term, will also affect your decision about how you invest. For instance, if increasing your cash flow is important, then an investment property in a higher rental yield location is a priority. If youre interested in a longer term increase in capital growth, and cash flow is not such a big deal, you might focus on properties located in regional areas or up and coming suburbs.

4. How much can I borrow?

Once youve set out your wealth goals and formed a strategy based on timelines, key financial milestones and priorities, youre in a position to start thinking about a loan. Simple, online tools such as BankVics calculators are a great place to understand your borrowing capacity, and the likely repayments on an investment loan. Typically, an investment loan requires a 20% deposit on the purchase price. Other costs such as stamp duty, legal fees and loan fees can also be researched online. Always seek loan pre-approval before starting your search for an investment property in earnest.

5. What is my budget?

You've got a financial strategy, you may even have an understanding of what you can borrow and the costs, so now its time to pull it all together into a monthly budget analysis. Start by listing anticipated rental income in one column and identifying your expenses in another. List every expense you can think of including: 

  • Rental management fees 
  • Home, contents and landlord insurances
  • Council rates
  • Water bills
  • Possible body corporate fees
  • Average maintenance costs (your local real estate agent should be able to advise on an average annual allocation) 

This is the real stress test and provides a clear indication of how much it’s likely to cost you per week, per month or per year to own an investment property. What you can borrow and what you can genuinely afford in repayments may not always align, but once youve created your income versus costs analysis, you will have created the last piece of the financial preparation puzzle!

The information in this article is general in nature and does not take into account your personal situation or needs. Please consider whether it is appropriate for you or speak to a financial advisor before acting on this information. Police Financial Services Limited ABN 33 087 651 661 – trading as BankVic AFSL 240293 Australian Credit Licence 240293.