Section 1 - Why do you want to buy an investment property?
This seems like a simple question but sometimes it can be difficult to answer.
There are many different reasons people want to buy an investment property and not all of them are good ones.
Everyone else is doing it? Your parents had an investment property? Do you think it's the way people get wealthy?
Do you know someone who knows someone who made a heap of money in property?
Before you start down the investment road, there are a few things to consider first.
Is property investment really for you?
Do you want the responsibility of dealing with another property including the associated costs?
Do you really want to have the headache of tenants and property managers?
Can you afford another property?
Do you understand all the risks?
Could you afford to fund that property if was vacant for a period of time?
How will a downturn in the market affect you?
What is the end result you are hoping to achieve?
This last question is actually the most important. "What are you hoping to achieve?"
In order to answer this question, we have to jump forward a few years to retirement. Delving into what you want your retirement to look like is where it all begins. You have to know where you want to end up, to be able to formulate the plan to get there.
Section 2 - Retirement
What is the best way to fund your first investment property purchase?
It's never too early to start thinking about investing and this question has no simple answer.
Please note that as a Mortgage Broker I can set up the loan facility required for these strategies, but I cannot make recommendations for the investment strategies themselves. You must seek the advice of a Licenced Financial Planner if you want to investigate this further or obtain advice regarding the purchasing of shares or other such investments.
There are just a couple of methods:
If you don’t already have the equity in your existing home loan you can make additional payments and pay down your principle as quickly as possible. The intention being to use the equity to purchase your 2nd property. Sounds simple enough, but you have to consider the possibility of the property market turning downwards and any additional funds you have put into your mortgage being eaten up in the lower valuations. For example, let’s say your mortgage is 400k and you put over and above the required payment and you get your mortgage down to 380k. If the market declines, your property value may drop to 380k and you literally have zero equity due to the poor market. Having said that, the opposite could also happen if the market takes an upward turn, then you have more equity than you put in.
You could put the additional funds in an investment account ie shares. They may not be as affected by the property market fluctuations, but you also run the risk of share prices falling and the value of your investment also falling.
Open a term deposit account, with slightly higher rates than a savings account and you can't touch your money for a specific amount of time ie 6 months, 12 months 2 years etc
Use a debt recycling method which involves creating an investment split against your home loan to purchase shares. You can do this at regular intervals so that eventually the non-deductable home loan debt is replaced with tax-deductable investment debt and you end up with a share portfolio as well. Any earnings from your share portfolio can either be used to pay down your home loan quicker or you can use it to invest in more shares. You can then use the shares to fund the deposit for your next purchase. Again you run the risk of a downturn in the share market eating up any gains you may have made.
There is no right or wrong way. It all comes down to the one you are most comfortable with, in the end.