29 December 2020

5 Steps to Buying an Investment Property

Written by Tuan Duong
Founder & Director

Buying an investment property can be a great way to climb the property ladder and create wealth. 

However, one common misconception among many first-time property investors is that buying an investment property will always result in positive returns. 

While this could be true, it certainly doesn’t happen overnight. Not only do you need to manage your property once you’ve bought it effectively, but there are also many factors you need to consider before actually going through with the purchase. 

Equipping yourself with as much knowledge as possible before buying an investment property could save you thousands of dollars in the long-run and help you see positive returns. 

For example, what are the factors you should consider? How do you effectively manage your property? What investment strategy should you use? And what is a depreciation schedule? 

These four steps will help prepare you for buying an investment property. 

1. Can You Afford It?

Before you even start looking for properties, you need to set up your budget to know you’re able to balance your cash flow,  income and expenses. 

For example, you’ll want to ensure that you can afford to pay your mortgage payments in the long-term. 

An excellent place to start is to calculate whether you can afford the deposit. Generally, you’ll need to pay a 5-10% deposit when buying an investment property.

When budgeting, it’s also important to consider all the taxes involved with buying an investment property, such as: 

  • Stamp Duty - this is one expense that is likely to poke a significant hole in your budget; and
  • Capital Gains Tax - you’ll definitely want to consider the six-year rule to avoid CGT

Other upfront and ongoing costs you will need to include in your budget include:

  • legal fees; 
  • property valuation and quantity surveyor fees; 
  • real estate leasing fees; 
  • land tax; 
  • lenders mortgage insurance; as well as 
  • home and contents insurance

Remember also to consider all the significant tax deductions that come with buying an investment property. 

One of the most significant tax deductions you can claim is depreciation. We’ve got a handy depreciation deduction calculator that you can use to see just how much you can save on depreciation tax deductions.

2. Property Professionals You Should Consult

You must consider consulting professionals regarding all aspects of buying an investment property. 

You should speak to mortgage brokers, accountants, conveyancers, quantity surveyors and buyer’s agents to help you decide whether buying a property would be a valuable investment for your current financial circumstances and your future financial goals. 

It definitely pays to speak to an expert!

Mortgage Brokers

Mortgage brokers are professionals who help guide potential buyers through the complexities of applying for a home loan. 

Taking out a loan for buying an investment property is a significant commitment, so you’ll want to reach out to a mortgage broker to help improve your chances of having your application approved. For example, they might advise you first to settle some of your other financial obligations to improve your credibility. 

With banks clamping down on applicants with stricter lending rules, you’ll want your application to be perfect. Along with the financial advice, mortgage brokers can help polish your application to make sure it’s accurate. 

Accountants

Consulting with an accountant can be valuable when preparing for the financial impact of buying an investment property.  

They can advise you on how much interest you’ll pay over time, whether your mortgage obligations will fit into your current financial situation, as well as how to limit your liability and minimise your debt.

Or, if you’re thinking of buying an investment property through a Self-Managed Superannuation Fund (SMSF), your accountant can advise you on how this can impact your tax planning.

An accountant can also help manage your finances and submit your tax return once you’ve bought your investment property.

Conveyancers

Conveyancing is the legal process of transferring ownership of a property from one owner to another. Conveyancers are professionals who specialise in property law. 

The process of buying an investment property generally involves three steps that require you to consult with a conveyancer:

  1. entering into a contract of sale; 
  2. financial settlement; and 
  3. registration of the transfer

So, simply put, these property professionals handle all the legal aspects of buying an investment property. Once you’ve found your property and sign any paperwork, you must consult with and hire a conveyancer or solicitor for the transaction going forward.

Quantity Surveyors

A quantity surveyor is a qualified construction expert who specialises in the assessment and observation of construction costs of a property.

Not only do quantity surveyors specialise in construction costs, but they are also recognised by the Australian Tax Office (ATO) as one of the few expert professions qualified to compile tax depreciation schedules for both residential and commercial property investors.

So, quantity surveyors are incredibly valuable when it comes boosting your investment property tax deductions.

See more about tax depreciation schedules in step 5.

3. What’s Your Investment Strategy?

Depending on what you had in mind for your property investment, you’ll need to decide on an investment strategy. 

Buying an investment property is not as simple as just buying it, finding a tenant for it and hoping for a good outcome. You need to have a strategy in place that aligns with the goal you hope to achieve. 

For example, do you want to buy and hold the property with the objective of holding onto it long enough to generate capital growth? Or search for an old, broken-down property, flip it and sell it an increased sale value?

Have you heard of rentvesting? If you’re looking to climb the property ladder, but can’t afford to buy in the area you want to live, then rentvesting could be your key to entering the property market.

The rentvesting strategy involves purchasing an investment property in an area that suits your budget, generally outside of the city. At the same time, you rent a property in an area that fits your lifestyle.

There’s no one-size-fits-all strategy, so you need to find the best one (or even two) for you and line it up with the objectives you had in mind when you first decided to buy an investment property. 

Deciding on the best property investment strategies for you can be a daunting task, especially if you’re a first-time property investor. So we've created a list of some investment strategies every investor should know. Make sure you check it out!

4. Find Your Property

After budgeting and determining your home loan size, the next step is to find your property. 

There are various factors you’ll need to take into account when buying an investment property. If you’re a first-time investor, make sure your decision is based on research and data, not emotion.

While it’s understandable to base your decision on your heart’s desires when it comes to buying your home, you need to remember that you are buying an investment property to create wealth. 

With that being said, some of the factors you need to consider when buying an investment property are:

  • Location: is the property in an area where you are likely to get tenants and experience property price growth?
  • Infrastructure: to get someone to rent your property, you need to consider the property itself and the area’s infrastructure. Your investment property will be far more attractive to a potential tenant if there are good schools, restaurants and public transport in the area. 
  • Demographics: is the property suited for the majority of tenants in the area? For example, if you’re in a university town, your tenant demographic will be students looking for a low-maintenance property.
  • Potential to add value: is there the possibility to renovate and add value to the property through those renovations?

Here’s where consulting with a buyers agent could be to your benefit. 

They can save you valuable time researching the market and identifying a property best aligned with your investment strategy. They are also experts in the field of property price negotiating.

5. What Happens After Buying an Investment Property?

Once you’ve settled on your ideal investment property, the next steps will depend on your investment strategy. 

For example, if you’ve gone with the flip-it strategy, you’ll want to get on the renovations as soon as possible so that you can have it back on the market in at least 12 months. 

Or,  if you’ve gone with a long term strategy, you’ll want to ensure that you are maximising your tax deductions. There are significant tax deductions that come with buying an investment property. 

One of which is depreciation. 

Did you know that 70% of property investors in Australia don’t buy a tax depreciation schedule? 

Depreciation schedules are one of the most effective but underused tools available for property investors to maximise their returns.

So many investors miss out on the opportunity to save thousands of dollars each year because they don’t realise the cash flow benefits of obtaining a depreciation schedule.

Simply put, a depreciation schedule is a report that details the tax depreciation deductions you can claim on your property. 

The purpose of a depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim.

To learn more about the importance of ordering a depreciation schedule when buying an investment property, read our essential guide on depreciation schedules.

Key Takeaways

The key to buying an investment property is making sure the property and your strategy align with your current financial situation and future financial goals. 

The next important tip is to take full advantage of the tax deductions available to you - especially depreciation. Knowing about your investment property tax deductions will undoubtedly boost your tax return.

Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positive cash flow. 

The last piece of advice we can give you is to make sure to seek a professional’s help in all aspects of your investment property, including a financial advisor, property manager,  mortgage broker and quantity surveyor. 

It pays to speak to an expert!

As a team of property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment. 

For the past five years, the Duo Tax team has helped thousands of investors maximise their deductions through the power of depreciation schedules. 

To see how our quantity surveyors can help you, get in touch today!

Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
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