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Is Cash Really the Best Way to Finance your Investment Property?
Investing is risky business no matter what vehicle of investment you choose. Even just putting your money in a savings account can carry risks, the principal one being an inevitable rise in inflation. There are two main objectives to any investment. They are protecting your investment, and growing your capital. Investing in property to generate rental income, does just that. Baxton Property Management in Hobart examines the various options for financing it.
Although the property market is as much subject to highs and lows as any other type of investment, it is considered a reasonably stable investment over the medium to long term. This is an important point, because both the property and the rental income will appreciate over time.
Rental properties are generally considered to be a medium to long term investment. If you are a first time rental property investor, and deciding how to finance your investment, you need to bear this in mind, and work out the best way to benefit from it.
Is cash still king?
That would depend very much on what kind of person you are. If you prefer to not have the responsibility of loan repayments, and you are a high income earner, or you have a sizable nest egg tucked away, then paying cash for the property makes sense.
When paying cash for your property, you are not concerned if the market takes a downturn or you hit a minor cash flow bump, as you don’t have any mortgage repayments hanging over your head. In the event of a recession, you are not greatly affected, as you are already renting out your property, thus assuring you of cash flow in difficult times.
Seeking help from a loan
If by using your cash to purchase the property, you are left with very little to maintain it and pay the necessary taxes and levies, you would be better off considering taking out a loan for a portion of the purchase price. This will leave you with capital to withstand the ups and downs of owning an investment property. But, although interest payments on your loan are tax deductible, that interest payment over the long term can be quite considerable. And this would affect your return on investment.
Signing on for a mortgage
There are advantages to using a mortgage to finance your property purchase. These include the implications of negative gearing in the case of capital gains tax.
However, applying for finance can be a very frustrating and time-consuming experience, and possibly lose you a bargain buy or two along the line because of these delays. Sales for cash generally take much less time to finalise, allowing you the opportunity to snap up a bargain.
Then there are also the variables of whether you should go for fixed interest or variable interest, is debatable. Historically, a variable interest rate is cheaper, but if fixed interest is chosen at the correct time, it can generate substantial financial benefits.
Call in the experts
There are many different ways to structure a loan or mortgage, from many different sources. The way that you structure your loan will directly affect your financial wellbeing, and the responsibilities you must assume. It is a mine field for the uninitiated, and we strongly recommend that you seek the advice of a financial advisor.
Financing your investment property purchase is fraught with many variables. Both cash, and mortgage financing, carry advantages and disadvantages. A final point: Property management is recommended to maximise the benefits and minimise the hassles of investment property. At Baxton, leading property managers in the Hobart area, we are perfectly equipped to bring you the benefits of professional property management. For more info visit the Baxton website.
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We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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