MELBOURNE’S soaring property prices might have foiled first-home buyers but they’ve opened the way for a new batch of first-timers: the mum and dad property investor.
Armed with increased equity in their family home, these novice investors are looking to build wealth with a property portfolio.
If you’re thinking of joining them, there are a few things you should consider:
Many long-term homeowners have not only put a major dent in their mortgage but have seen the value of their property grow in recent years. The difference between what is owed and what the property is worth is known as equity.
‘The recent surge in property values means that they may have a significant amount of equity in their owner occupied dwelling that they can tap into,’ Mortgage Choice spokeswoman Jessica Darnbrough said.
This is how it works. Most lenders will let you borrow 80 per cent of an investment property’s market value (more if you are prepared to pay lenders’ mortgage insurance).
To meet the 20 per cent shortfall, you can access up to 80 per cent of your own home’s equity.
For example, if you intend to buy an investment property for $400,000, you can borrow 80 per cent or $320,000 provided you meet the lending criteria.
But with legal fees, stamp duty and other charges, you still need about $100,000 to buy the investment property.
You can use your equity to do this. Say you have $200,000 equity in your home (the difference between its $500,000 market value and the $300,000 still owed on the mortgage), you can borrow up to 80 per cent or $160,000.
The next step is finding the right investment loan.
National Australia Bank general manager of home lending Melissa Reynolds said there were a number of options, including interest-only loans, loans where the principle and interest amounts were paid, loans where interest was paid in advance and fixed and variable rate loans.
She said interest-only loans were popular with investors because they meant lower monthly repayments for a set period, typically 10 years, over which time the investment property’s value increased.
Ms Reynolds said it was important investors also factored in the other costs of buying, including stamp duty, government fees and charges, rental agency fees, strata or body corporate levies and rates.
‘They all need to be understood in your total budget when you’re looking at an investment property,’ she said.
CAPITAL GAIN OR RENTAL INCOME
There are two ways an investment property can work for an investor: by providing rental income and by growing in value over time.
‘Some people are looking for a good stable place to store wealth and are most interested in capital gain over the long term,’ RP Data Melbourne market expert Robert Larocca said.
‘Others are looking for good rental yields and are not as interested in capital gains.
Mr Larocca said generally, the best rental yields in Melbourne were in high-rise apartments and houses in the outer suburbs; while the middle and inner suburbs produced the strongest capital growth.
Regional hubs were another option for good rental yields, with some of these areas also offered solid capital growth.
New figures from RP Data suggest a long-term approach might be best in Melbourne, which has the lowest rental yields of any capital city in the nation. Rental yields for a typical house in Melbourne were 3.2 per cent in the three months to October and units were 4.1 per cent.
WHERE TO BUY
Investors should look for properties close to shops, schools, parks, restaurants entertainment facilities and transport, according to WBP Property chief executive Greville Pabst.
But he warned against buying a property on a main road or too close to train and tram lines.
‘Properties in these areas can suffer from traffic congestion, impeded access and significant noise disturbances. Select properties located within walking distance to a bus route or train line in quiet streets or cul-de-sacs,’ he said.
HOUSES OR UNITS
While houses had traditionally outperformed units for capital growth, Mr Pabst said changing economic and lifestyle factors were seeing units close the gap.
‘As rental affordability in capital cities tightens many tenants are choosing more affordable and convenient apartment living,’ Mr Pabst said.
He said land values appreciated while building values depreciated.
‘If the value of the property is weighted towards the dwelling … it is unlikely to benefit from significant levels of future capital growth,’ he said.
BE PREPARED FOR TENANTS, LANDLORD SAYS
ADRIAN Barnes has learnt a lot about property investment since he and his wife, Debra, first became landlords about 18 years ago.
They have owned seven or eight investment properties since then and currently have two inner suburban apartments and a Frankston house in their investment portfolio.
‘They main lesson I have learnt is that you have to toughen up,’ Mr Barnes said.
‘We’ve got great tenants now but we’ve had properties with tenants from hell, a real nightmare.
‘It’s not their property and a lot of them just don’t care, so you have to make sure you’re tough enough to deal with that.’
Mr Barnes, who lives in Frankston South and runs a property maintenance business, said a key to his success was buying affordable properties that he could improve.
‘I always buy the cheapest, nice property I can find and add a bit of value.’
He said being able to do his own maintenance and renovation work had saved him a lot of money over the years.
Mr Barnes said he treated property investment like a side business, devoting up to 10 hours per week to research.
‘Research is really important otherwise you are going in totally blind.’
A good finance broker was also key to success, he said.