Investment Loans

Choosing appropriate investment loans is essential to your future success as a property investor. The key loan types are the following, with the advantages and disadvantages:

1.1 Interest Only Loans
Benefits:
– Reduced initial repayments, freeing cash.
– Possible deductions on tax on interest payments.
Drawbacks:
The interest only period has no decrease in the principal of the loan.
Greater annual interest expenses throughout the loan.
Best for: Short term cash flow, crowds or those intending to sell the property in a couple of years.

1.2 Principal and Interest (P&I) Loans
Benefits:
Grows equity over the years through principal repayments.
Interest rates are usually lower than in interest only loans.
Drawbacks:
Higher monthly repayments.
Best for: Long term investors who are also interested in capital accumulation and growth of equity.

1.3 Fixed Rate Loans
Benefits:
• Predictable repayments, aiding in budgeting.
• Protection against interest rate increases.
Drawbacks:
Limited flexibility for extra repayments.
There is a possible break fee in case of premature loan termination.
Best for: Investors who need stability and safeguarding from interest rate fluctuation.

1.4 Variable Rate Loans
Benefits:
Ability to make extra repayments at no cost.
Opportunity to benefit from rate reductions.
Drawbacks:
Higher interest rates result in higher amounts of repayment.
Best for: Investors who are comfortable with variable repayments and have the requirement for flexibility.

1.5 Split Loans
Benefits:
Offers the safety of a uniform rate coupled with the ease of a variable rate.
Customizable split portions based on investor needs.
Drawbacks:
Managing two loan components can be more complex.
Best for: Investors who want a balance between stability and freedom to repay.

Normally, the Lenders Mortgage Insurance (LMI) will not have to be paid on a 20% deposit, which means on a house worth half a million dollars, it is a $100,000 down payment. Some lenders will accept deposits as low as 5% though this is normally accompanied by LMI and restrictive lending terms.

Yes, you could use the equity in your current property as a source of financing for a new investment.

How it works:
• Lenders usually allow borrowing up to 80% of your property’s current value.
• Find usable equity by subtracting your current loan balance.

Example:
• Current Value of Property: $800,000
• 80% of Value: $640,000
• Current Loan Balance: $500,000
• Usable Equity: $140,000

This means that you have $140,000 in usable equity that can be used towards the deposit on your next investment property without having to save any money.

Negative gearing is when the expenses of your property (such as interest, maintenance, and management costs) are a lot more than the rental income.

Benefits:
Your taxable income can be lowered by the loss, resulting in potential tax savings.
Short term losses can be compensated by long term capital increase.

Considerations:
You need to be in a position to finance the difference between revenues and costs.
Claiming tax advice is always advisable, depending on your case.

Yes. Increasing attractions to investors in Adelaide include:

– Affordability: Low prices of entry as compared to other capitals.
– Rental Demand: There are low vacancy rates, which translates to high interest amongst tenants.
– Good Rental Rates: Good market returns in most of the suburbs.
– Future Growth: The regions of Tea Tree Gully, Salisbury and Mount Barker have seen continued growth over the past several years in the residential home market.
– Economic Viability: The economy of South Australia continues to grow primarily as a result of increasing amounts of infrastructure projects and jobs being created.

The main aspects to be considered are

Location: Schools, stores, transit, and job opportunities should all be nearby.
Condition of the property: The older houses can require more maintenance.
Rental Yield: Determine the kaleidoscope of the possible income versus the purchase price.
Capital Growth: A study of the past and future developments of the region.
Tenant Demand: Select locations where there is a low vacancy rate and a steady demand.