If you’re thinking about investing in property, it can pay to know the answer to some important questions before jumping in.
Should I buy my first home before investing in property?
Not necessarily. The great Aussie dream has always been to own a home but it’s not always the best strategy, especially if affordability is an issue. A growing trend is something called “rentvesting”. This involves renting where you want to live but still looking after your future by investing in property.
“In simple terms if you could afford to buy in a location and the mortgage repayments were $4000 per month, yet to rent a similar property in the same location it was only $2000 per month, then you have a spare $2000 per month to invest in property,” explains long-term investor and Baxton Property Management CEO Kellee Pennicott.
The goal is to build a property portfolio that grows in value and offers passive income over time and to maintain your lifestyle by living where you want instead of where your budget says you should. For rentvesting to work you must actually invest the surplus money, otherwise more than likely you would have been better off financially with the buy-and-live option.
Should I pay principal and interest or interest only?
The advantage of taking an interest-only loan is that the repayments will be lower, making it more affordable. The extra cash can then be used for other goals.
On the flipside, though, some lenders charge a higher rate on interest-only loans and most lenders limit the number of years a loan can be interest-only. When that time is up you can try extending it or you will have to revert to principal and interest, which could mean quite a big jump in repayments.
With interest rates currently so low it can make sense to pay off some of the home loan principal now, so if rates rise in the future you will be paying those higher rates on a reduced loan size, says Canstar. The right decision will vary depending on your personal circumstances. If you have non-deductible debt such as a home loan, then you might consider using the savings you have made by paying interest-only to pay down that debt.
How do I spot a property spruiker?
Dodgy seminars and free flights are usually a dead giveaway but some property spruikers may be more subtle in their approach. Empower Wealth’s Bryce Holdaway says one sign is that they are recommending properties that have been heavily marketed away from the local area.
Another sign is rental guarantee. “To me that is a huge warning bell. Because if you are buying an investment property and it is in demand by tenants in the local area, why do you need a rental guarantee?” he says. Another sign is a heavy emphasis on tax. Holdaway says you shouldn’t get seduced by the tax; just see it as a bit of a bonus.
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