To give you the best chance in succeeding with your investment strategy, take the time to research and understand how investment works.
Generally, investing in real estate can provide you with the financial benefits of capital growth and negative gearing.
What is capital growth?
Capital growth is the difference between the price that your paid for your property and the amount that it is worth today should you be able to sell. You make (or loose) money as your property appreciates (or depreciates) in value. It is not in common to see property values in the big cities double over the course of a few years during a period of boom or rapid growth.
While there is never any guarantee that your property will increase in value, historical analysis of an area will usually show a steady increase in value over time.
What is negative gearing?
Negative gearing occurs when you take our a home loan or mortgage for the purpose of buying an investment property and the interest repayments and deductible expenses are more than the money you make from renting the property out. With interest payments on investment loans being tax deductible in Australia (for the short term at least!), the astute investor may qualify for a total net tax deduction against there taxable income for the year.
Basically this means that the more you borrow, the more your interest bill and the bigger the potential deduction on your taxable income. Whilst a tax deduction can be nice, it is important to remember that borrowing just to deduct tax may not be your best investment option - particularly if you make a poor purchase decision.
Home loans for investment properties
A home loan for the house you will live in and a home loan for a property investment (ie to rent out) differ in a few key areas.
Usually, a bank, lender or other institution will charge a higher interest rate for an investment loan because they believe the associated risk is greater. The key is to call on the services of an experienced mortgage broker to help you identify the best investment loan available.
During the process of buying an investment property, ensure that you would do everything as if you were purchasing a home that you would be happy to live in. Understand the process and make sure you are familiar with the area you are buying in. You don't want to buy in an area that has experienced no capital growth or that could be affected by future capital works projects such as major roadways or flight paths; especially if you live in Sydney!
You should also budget to see how much you can afford to repay and get an early understanding of how much a lender may let you borrow.
One of the best ways to start on your road to future riches, is to speak with a mortgage broker to understand how getting the right investment loan can mean the difference between good returns and great returns.
KB: Q0018
Last Updated: 26 Sep 2006
