finance

Smart investment property funding: know your goals

By Phillip Tarrant

With rental returns set to soar and interest rates on the decline there’s never been a better time for investors to explore the property market.

 

As property price growth has slowed across most markets over the last 12 months we’re now in a truly buyer's market and that means there are bargains out there for investors.

But to make the most of your property investment the right finance is essential.

The first consideration for prospective investors is your overall strategy, as this will influence how you fund your property. You’ll need to consider whether your primary objective is a cash-positive investment from the start or if your main goal is capital growth in the property value over a set period of time.

If generating cashflow is the most important consideration for the immediate future, you’ll need to think about how much of your own money you can afford to put into your investment.

Quite simply the less you borrow, the lower your monthly loan repayments and the greater impact your rental income will have on servicing your loan commitment and even returning a profit.

While positive cashflow is important to some investors, others may be focused on longer term growth in the property value.

In this instance investors are often willing to cover the difference between their rental income and loan repayments themselves.

The term for this approach is negative gearing and while you’ll need to find the funds to make up the shortfall each month you may be able to claim back any loss made on your property against your income tax at the financial year end.

Financing investment property is much the same as funding your own home however investors who are looking to maximise their cashflow often opt for an interest only period – usually for the first five years.

By only repaying the interest on your loan you’ll minimise the shortfall between your rental income and your mortgage repayments. Then over a period of time by increasing the rental price incrementally it should eventually reach the same level as your repayments, leaving you with a cash-positive investment.

Over the years property has proven a solid investment for many Australians. To ensure your investment is successful make sure you research the market thoroughly, identify your objectives and organise your funding before you set out.

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Smart investment property funding: know your goals
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