The Golden Rules of Buying Your First Investment Property in 2024

As we welcome 2024, many of us are looking into property investing in the hope of reaching our financial goals. If you’re set on buying your first investment property, understanding the golden rules of property investment is a good place to start. Today, we’ll share some of these golden rules, which can serve as a roadmap as you begin your real estate journey.

Understand the Market Value and Potential

One of the key strategies in property investment is purchasing properties under market value with the potential for added value. For instance, you’re eyeing a two-bedroom property in a developing suburb that is priced below market value simply due to cosmetic issues. If you repair that property and do minor renovations, you may be able to significantly increase its value and rental yield. 

However, the strategy of paying under market value requires thorough market research. Learn why a seller might be motivated to sell quickly; Is it simply because of a few repair issues, or are you about to get your hands on a too-costly house-flipping project? You also have to study the local property market. What makes the neighbourhood desirable? What drives the rental demand in that area? Know these things so you will be better equipped to buy an investment property in 2024. 

Research and Pick the Right Suburb

Location is a cornerstone of property investment. Look for suburbs with strong growth potential, good infrastructure and amenities. Consider factors like proximity to transport, schools, and shopping centres, which are attractive to tenants and can drive capital growth. A suburb with upcoming infrastructure projects could also be a wise choice because it offers potential for growth as the area develops. 

If you’re thinking about purchasing property in Hobart, you’ll find suburbs that can offer scenic beauty, a relaxed pace of life and educational & employment opportunities to your potential tenants. Check out our blog about the allure of buying a house in Hobart to learn more about living in this thriving city and its suburbs. 

Save a Deposit

Your property investment journey should begin with a solid financial foundation. Saving a large home loan deposit helps to reduce your loan-to-value ratio (LVR), which in turn reduces costs. A deposit of at least 20% of the property’s value (80% LVR) can help to avoid Lenders’ Mortgage Insurance and secure more favourable loan terms. If you’re targeting to buy an $800,000 investment property, a 20% deposit equates to $160,000. This commitment demonstrates financial discipline and reduces your borrowing needs.

Invest with Logic, Not Emotion

Investment decisions should be based on financial viability, not personal preferences. Investors often look for properties that appeal to a broad rental market and have potential for capital appreciation. Avoid emotional attachments and focus on the numbers. For instance, a practical, well-located two-bedroom apartment might yield better rental returns and appeal to a wider market than a large, luxurious holiday property. 

Exercise Caution with Auctions

Auctions can be a gold mine for good properties to rent out, but they are often competitive and emotionally charged environments. You may overbid and let your first investment property cause a financial strain rather than gains. Consider private sales, which often offer more negotiation flexibility and a cooling-off period. But if you’re set on an auction, be sure to get a home loan pre-approval and have a clear ceiling price before bidding. That way, you won’t overbid and scramble to get suitable financing right after winning an auction. Keep in mind that pre-approval is subject to the value of the property; you could have pre-approval of up to $800,000, but if the property is valued significantly less and does not meet the lender’s LVR requirements, there’s a chance you won’t be able to access the finance despite the preapproval. 

Understand the Concept of Yield and Cash Flow

A successful investment property should generate a healthy rental yield, ideally higher than the suburb average. This involves calculating the gross rental yield and considering the net yield after expenses.

For example, a property purchased for $450,000 with a weekly rent of $475 would have a gross yield of approximately 5.49%. Your required yield depends on your investment goals and should take into account taxation implications. 

Learn the Nuances of Investment Loans

When venturing into property investment, comprehending the intricacies of investment loans is pivotal. Here are some key considerations for investment loans:

• Loan-to-Value Ratio (LVR): Understand the LVR you can achieve with your investment property loan and how it impacts your borrowing capacity. An LVR of 80% and higher will require an additional payment for lender’s mortgage insurance. Lower LVR’s often mean lower risk to the lender and often come with more favourable  interest rates.
• Interest Rates and Loan Terms: Compare different investment loan options, focusing on interest rates and terms that align with your investment strategy.
• Rental Yield vs. Loan Repayments: It’s important to understand where the cash flow for loan repayments will come from. If your investment strategy requires a positively geared investment, the expected rental income from the investment property will need to comfortably cover the loan repayments and other associated costs.

Moreover, many people don’t realise that they can use the equity in their current home as a deposit for their first investment property. This approach is particularly beneficial if you lack the necessary cash savings or prefer to reserve your cash for other purposes. Suppose your home is valued at $800,000 with a loan balance of $500,000. In this scenario, you could potentially access equity up to $140,000 (assuming a borrowing capacity of 80% of your property value). Many property investors use their equity as a springboard for buying an investment property in Australia.

Get Expert Guidance from Deltos Finance

Entering the property investment market in 2024 requires a blend of strategic planning, financial prudence and market insight. If you need expert, tailored advice and support, Deltos Finance is ready to assist your first foray into property investment.

Our mortgage brokers in Hobart specialise in investment loans and equity release loans. Their expertise lies in advising exactly how much equity you can access and whether it’s enough and feasible to help you afford a new investment property. They also assess if the potential rental income can meet your financial goals.Contact us today to speak with one of our seasoned mortgage brokers in Hobart.