Lesson 4.7

5 simple steps to buy an investment property

Borrowing to buy property can be a powerful way to build your wealth position, provided you do your research, buy well and seek appropriate guidance.

There are many good sources of property information out there and as an investor, you should be committed to continuous learning. Here are five small steps to get you started on your property investing journey.

Step 1. Check your ‘equity’ position

While some investors choose to buy an investment property as their first property purchase, many investors come to property investing having purchased their own family home first. 

If so, you may have something called ‘equity’ in your family home that can assist you to borrow to invest in further property. Your ‘total equity’ is the difference between the current value of your property and how much you still owe on your home loan. 

For example, if your home is worth $800,000 and your home loan balance is $500,000, you are said to have equity of $300,000 in your home. 

You may be able to use a portion of this equity as a deposit on your new investment loan. Banks are generally comfortable lending up to 80% of the value of your home, minus the amount you owe to the bank. In our example, 80% of $800,000 is $640,000, so the useable equity is $140,000 ($640,000-$500,000).

Step 2. Figure out how much you can borrow

Use an online calculator, such as the CommBank Borrowing Power Calculator, to estimate how much you may be able to borrow. Or if you prefer, book in to talk directly to a home lending specialist to assess how much you may be able to borrow to fund your property investment.  

Step 3. Do your research  

It’s also important to consider the upfront and ongoing costs of property ownership, such as stamp duty and land tax payable, real estate agent fees and ongoing maintenance costs.

If you are a CommBank customer, the Home Hub section of the CommBank app can provide you with access to free property reports and valuations, and help to track and manage your loan application process in one convenient place.

Step 4. Talk to your accountant or tax advisor

Investing in property can come with significant tax implications. As tax rules are complex, speak to a trusted advisor to learn more about the implications for how much tax you will pay and whether any particular strategies are suitable to your circumstances (such as negative gearing). You can also visit the ATO website at ato.gov.au for more information.

Step 5. Keep good records

Be sure to keep good records of all expenses you incur as part of holding your property, as the ATO may ask you to provide evidence to support any deductions you make in your tax return. 

Some costs, such as interest, real estate agent fees and insurance, may be claimed in the tax year in which they are incurred, while others, such as stamp duty and capital works undertaken, may be deducted from your initial purchase cost when it comes to calculating any capital gain after sale.  You can find out more about rental expenses you can claim at the ATO website.