Your step-by-step guide to buying an investment property

Having a clear plan is your first step towards buying an investment property – here’s what you need to know.

When preparing to buy an investment property it’s important to get the financial foundations right first.

This includes working out how much you can borrow and subsequently spend, as well as the location of your investment, so you don’t end up over-committing to a property that puts pressure on your budget.

No matter your investment goals, it’s important to do the necessary research, have a clear plan, and engage experts to help you. Picture: Getty

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These five steps can help you get your foot on the investment property ladder.

Step 1: Obtain a deposit and work out how much you can borrow

Where are you getting the deposit for your potential investment property purchase? Do you have savings in cash, or will you use equity in your existing home?

Equity is the difference between the current value of your property and the amount you owe on your home loan.

Most lenders will let you access up to 80% of your property value (this can vary between institutions). 

Example

Sahim’s property is currently valued at $500,000 and he has an existing CommBank Home Loan owing $350,000. It’s important to understand that you can’t usually access all of the equity in your property.

• Sahim’s property estimate: $500,000
• Sahim’s existing home loan: $350,000
• Sahim’s equity access: $50,000

After speaking to his Home Lending Specialist, Sahim can borrow up to 80% of his property value (80% x $500,000 = $400,000).

Sahim now has access to $50,000 in equity ($400,000-$350,000). 

By accessing his available equity, Sahim’s existing home loan will increase from $350,000 to $400,000 and his repayments will be adjusted accordingly. 

Once you know your deposit, you can work out your borrowing power. Your deposit plus borrowing power gives you a clear idea of your property shopping budget.

In addition to the deposit, you’ll also need to budget for the other costs of owning an investment property, which include council rates, utilities, government taxes, property management fees, among other things.

Step 2: Decide your investment strategy

Next, work out what you want to achieve from your investment property.

Do you want a property that generates a high income and is profitable from day one? Or are you comfortable funding a small shortfall every month, with a long-term goal of paying down the debt while the property increases in value?

These types of questions will help you work out what type of property investment and gearing strategy suits you best.

This will also help you work out what type of property is more suitable: a capital growth property, or one that generates high yield.

Your investment strategy is the first step to understanding how you’ll achieve your goals. Call in the experts if you feel out of your depth. Picture: Getty

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Capital growth is the amount a property increases in value over time, while yield is the ‘return’ you receive on a property investment, most commonly in the form of rent.

Generally, high-growth properties are often more expensive and negatively geared, and high-yield properties are more affordable and positively geared.

Step 3: Begin researching property

Now that you have an idea of what you want to get out of property investment, you can start considering the type of property you want to buy and its location.

Properties near public transport, healthcare, retail, childcare and other amenities are typically more sought after.

Once you’ve decided where you’d like to buy, look at the sale and rental prices of comparable properties in the area to get a good idea of what your rental yield is likely to be.

CommBank’s Home Lending Specialists can provide you with customised Property and Suburb Reports for a comprehensive snapshot of any property or suburb you’re interested in.

Step 4: Choose the right loan

Different types of investment loans can help you achieve different results. 

CommBank Investment Home Loans are available with a range of options such as fixed and variable interest rates, access to offset accounts and redraw, and interest-only payment periods.

Choosing the right investment loan is crucial to the success of your investment journey – Commonwealth Bank is here to guide you at every step. Picture: Getty

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Consider which features are important to you, so you can tailor your investment loan to suit.

Step 5: Settle and manage your investment property

Settlement day proceeds similar as it would when buying your own home, except you don’t collect the keys and move in.

Instead, you engage a property manager and begin finding a new tenant or take over the lease agreement with the existing tenant.

If you choose to have a property manager they can  handle the day-to-day elements of your investment property, and with relevant insurance in place, you can have peace of mind that everything is running as it should.

So, if you’re ready to begin your investment journey, CommBank’s Home Lending Specialists  can help guide you through the entire process from start to finish.

Disclaimer: This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

CommBank Property and Suburb Reports contain information that is obtained from third parties and is not intended to be advice or professional property appraisal and should not be relied upon as such. You should also make your own enquiries and assessments before making any decisions.

Applications are subject to credit approval, satisfactory security and minimum requirements. Full terms and conditions will be set out in our loan offer, if an offer is made. Fees and charges are payable. Commonwealth Bank of Australia ABN 48 123 123 124.