Purchasing investment properties is a great way to build your wealth. They provide capital growth, consistent rental income and allow you to use the available equity to further grow your property portfolio.
The correct structuring of finance is as important as finding the right investment property. There are a number of factors to consider here, and making the right decisions will lead you to not only being successful with your first investment purchase, but also assist in building a profitable property portfolio.
When structuring finance to purchase an investment property, there are a few options to consider.
Cash deposit
The most straightforward way to enable your investment property purchase is to pay a deposit with your savings and borrow the remainder. How much of your own money you end up contributing will depend on factors such as your borrowing capacity and how much you have available.
This is will usually be at least 10% plus purchase costs (stamp duty, legals, etc.). This is suited to those who do not own any properties or do not have any usable equity in their properties.
Using equity
For those that own one or more properties there may be able available equity, against which a loan can be taken out to use as a deposit. The rest of the funds are then borrowed against the new investment property. This way, in effect, you are borrowing the whole purchase price. As the interest portion of the loan on the investment property is tax deductible, there may be instances where borrowing the whole purchase amount can be beneficial to you financially.
This is a great option if you have plenty of equity available in your home and do not have much savings.
Self-Managed Super Funds
While this is a more complicated process and requires the advice of an Accountant and Financial Planner, setting up and purchasing through a self-managed super fund (SMSF) is a viable investment option. The first requirement is that you have sufficient amount in your existing superannuation as that will need to be used as a deposit, plus there are additional requirements and expenses associated with this option.
There are many benefits to borrowing through SMSF. These include lower taxation rates, no impact on your personal borrowing capacity and protection of your personal assets (as you are making the purchase and setting up the loan in a trust).
There are a few points that are specific to investment finance worth keeping in mind:
- Investment loans are usually interest only. This means that your required loan repayments consist of interest portion only (they are lower than principle & interest repayments) and this improves your cash flow.
- Interest payable on the investment loan is usually tax deductable.
- There may be a number of deductions associated with owning an investment property, ie. maintenance and repairs, even a portion of your bills may be included as well. So, it is important to have an accountant who is well-versed in the investment property area.
Before making the step to purchasing an investment property, it is crucial that you first seek professional advice from a Mortgage Broker and Financial Planner. They will provide you with vital information such your capacity, timing of when you are able to proceed and how your finance should be structured. As everyone’s financial situation is different, you want to be comfortable that you are receiving advice tailored to your particular needs.
Taking these steps will ensure that you are on the right path to securing your financial well-being.
Are you looking to invest in property? Speak with an expert today to begin your journey.
By George Rodman
George Rodman is here to do one thing – help people achieve financial independence.
After watching a single mother struggle financially his entire life, George knew he wanted to help people have homes to call their own, reach some level of financial security, and to be in a position to help their children to have a home of their own.
He developed a love of property early on. George loved every aspect of – inspecting different properties, looking at floor plans, going to auctions and studying how the process works. George realised that property is like a game with its own rules and strategies, but unfortunately, in this game some people couldn’t even get a place on the board.
After 15 years of being in real estate and mortgage broking, George started Quicksilver Projects to bring sound advice and professional knowledge to the table to help everyone invest in property and create financial freedom.