How property investment could work for you
The uncertainty of the past couple of years has led many of us to reassess our financial goals. A recent survey1 has revealed that buying an investment property is one way people are looking to take control of their financial future.
If you’re thinking about investing in property, it’s important to understand how the process works as well as the potential benefits and the risks involved. Here are some of the things to consider before you get started.
The appeal of investing in property
If long-term investment is something you are interested in, property investment could be an option. It could, for example, earn you income through tenants and capital growth – if it increases in value when you sell, the profit you make is called a capital gain.
You may also reduce the amount of tax you pay, by offsetting some investment property expenses you have incurred against your income. In addition, by building up equity over time (the difference between how much you owe and what your property is worth) you might use this to buy another property or renovate your existing one.
The potential risks of property investment
Any form of investment has some uncertainty and borrowing to fund an investment property has an added level of risk to it.
Rental income – rental income is not always guaranteed. There may be times you have a longer gap between tenants due to unexpected repairs or market changes – for example a rise in interest rates if you have a variable rate loan, can affect your disposable income. So it’s important to make sure you can repay any investment property loan you take out, in the event that it doesn’t perform as expected.
The highs and lows of the market – a rise in home loan interest rates or an underperforming market may affect the value of your property, your mortgage repayments, disposable income and your profit margin.
Negative gearing – Negative gearing is when the income you get from your investment property is less than the costs of owning the property (mortgage repayments, maintenance costs etc.). It’s usually used as an investment strategy as it can offer advantages like tax deductions, but negative gearing can also have significant disadvantages. It is a loss after all. We recommend you speak to your accountant or tax adviser to explore whether it is an appropriate strategy for you.
Capital gains tax - Capital gains tax (CGT) can also affect your profit margin when you sell your property – your profit (sales price minus your original purchase price) will be included in your taxable income taxed at your income tax rate. Speak with your accountant or tax adviser to see if you’re eligible for a CGT discount.
Tip: It’s a good idea to do your homework to make sure your investment is the right strategy for your needs. Check out the government’s MoneySmart website for more information on the pros and cons of borrowing to invest or speak to your financial advisor.
An alternative way to buy property
A Self-Managed Super Fund (SMSF) may sometimes be used to invest in a range of assets, including property, and is regulated by the Australia Tax Office. It is a ‘do-it-yourself’ superannuation fund that can have up to four members, but the rules for setting them up and investing through them are complex and subject to change. The benefits can vary according to circumstances, so it’s important to speak to your accountant or tax adviser if you want to explore this strategy for your investment.
What is an investment loan and how does it work?
Property investment loans allow you to borrow money to invest in land, houses, apartments or commercial property. These loans work a bit differently to a home loan for a property you intend to live in. As an investment in property may generate income for you, that income may be factored into your ability to pay back the loan. Investment loan rates are usually higher than home loans, as the risks for the lender are higher as well.
How to apply for an investment loan
Traditional lenders have strict eligibility criteria for investment loans. If you don’t meet the banks’ criteria because you’re self-employed or have previous credit issues, Pepper Money may be able to help. We help all sorts of people from those with irregular income - like the self employed, through to people who have previous credit issues. The process for applying for an investment loan with Pepper Money is simple. We encourage you to have a chat with one of our Lending Specialists, so we can understand your situation and find you the best possible solution.
It’s a good idea to have your documents on hand to help speed up the process:
- Most recent group certificate
- Most recent tax return / taxation notice
- Current letter of employment
- Bank statements – to confirm last 3 months’ salary
Get a complete step-by-step guide to applying for an investment loan with Pepper Money.
Ready to get started? We're here to help
Find out more about Pepper’s home loans for investors. Speak to one of our Lending Specialists on 137 377 or try our home loan borrowing power tool to find out how much you could possibly borrow.
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Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
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