Is an investment property the right choice for you in retirement?
What you need to know about buying an investment property
Buying a rental property is a very popular investment in Australia. For many investors, the appeal of owning an investment property is linked to their familiarity with this asset class – most of us either own or rent a house, apartment or villa. Over time, a quality, well located property could generate long term growth and decent income returns.
Houses and units may be easier to understand as an investment than many other assets such as shares and bonds, yet owning an investment property is not a licence to print money. There are risks and costs budding landlords need to consider.
The costs of having an investment property include property management fees, legal charges, mortgage interest payments and landlord insurance. You may also need to consider whether you could service the costs of owning the investment property if a tenant decides to move on and you’re left with a vacant property.
If you’re not sure you could cope financially, you might need to rethink your investment strategy. Likewise, you need to be aware real estate prices can take a tumble.
Downsizing to buy an investment property
Downsizing into a smaller property or moving to a more affordable location could be a worthwhile way to help finance your retirement lifestyle.
It can be a valuable strategy for empty nesters, some of whom may find maintaining a big and empty family home no longer makes sense financially or from a lifestyle perspective.
By downsizing to a more affordable property such as an apartment or townhouse, you could unlock any significant capital tied up in the family home.
With this extra capital, you may have the financial freedom to invest in either an investment property or another asset class. Before you make a move, be sure to speak to a financial adviser to determine whether a downsizing strategy is right for you.
Take advantage of downsizer rules
Downsizer rules may help older Australians who sell their family home to invest some of the proceeds into superannuation.
From 1 July 2022 the eligibility age for downsizer contributions was reduced to 60 and from 1 January 2023 it is reducing further to 55. Under these rules, if you’re in the suitable age range you may make after-tax or non-concessional contributions into superannuation of up to $300,000 for an individual or up to $600,000 for a couple from the proceeds of selling your principal residence. The usual contribution caps of $110,000 per year ($330,000 under the bring forward rule) don’t apply and it doesn’t matter what your super account balance is (you would usually only be able to make after-tax contributions if your total super balance is less than $1.7 million on the previous 30 June)1.
Understanding the costs of buying/selling a property
The costs of buying a property include stamp duty for the property transfer and for the registration of your mortgage. Stamp duty is charged by state and territory governments so the amount you will pay depends on the location of the property and its price. To find a stamp duty calculator appropriate to your state, or territory, visit the ASIC Money Smart website.
When buying property, you should also factor in the cost of pest and building inspections, which vary depending on the size and location of the property.
Also don’t forget if you can save a deposit worth more than 20 percent of the value of your property you may not be required to paying lenders mortgage insurance (LMI). LMI is generally charged by a lender if your deposit is less than 20 percent of the value of the property.
LMI enables lenders such as a bank or a credit union to lend you a larger percentage of the purchase price. The cost of LMI may be included either upfront or in your loan repayments so it’s spread out over the term of the loan.
If you’re selling your current home and buying an investment, you’ll probably sell through a real estate agent and this means paying the agent a commission on the sale. Agents in your area will have different fees, so be sure to shop around.
There are also legal costs for the transfer of a property from a vendor to a buyer. You’re likely to need the professional services such as a conveyancer to legally transfer ownership of the property you are buying or selling. Your conveyancer will also conduct property and title searches to ensure the seller is legally entitled to sell the property. There may be some minor charges for completing these searches, in addition to the conveyancer’s professional fee.
There may be a range of fees levied by your lender such as application, valuation and settlement fees. Make sure you ask your lender or mortgage broker about these fees.
Once you secure the property, you may also need to take out landlord insurance. This is insurance that may protect the building and its contents and cover if the tenant defaults on his or her lease obligations.
How much can I borrow?
To estimate what you can borrow to buy an investment property, you could use a mortgage or home loan calculator to help translate the loan amount into a corresponding monthly payment. Calculators give you the luxury of playing with interest rates, deposit amounts and loan term to help you figure out what may be affordable. They can be useful tools to crunch some numbers and get a ballpark estimate. Though it’s worth noting that many calculators won’t give a complete picture of all costs and it may be worth considering advice from a financial adviser before making any financial decisions.
Once you know your borrowing power, you’ll have a better idea of what your next step will be. You’ll know whether you can afford an apartment or house near the CBD or out in the suburbs.
How can financial advice help with your investment property?
Financial advice could help you achieve your investment property goals and get the right strategies in place to help you achieve them. It can help you:
- Establish and achieve your financial goals such as buying an investment property or putting more money into superannuation.
- Make the most of your money with some sound advice around budgeting and establishing savings plans.
- Protect yourself and your assets by assessing your insurance needs.