Property investment can seem complex and intimidating when you're just starting out. But here's the truth: it's a skill that can be learned by anyone willing to put in the time to understand the basics. This guide will walk you through everything you need to know to get started on your property investment journey in Australia.
What Is Property Investment?
Property investment is simply buying real estate with the goal of generating income, capital growth, or both. Unlike buying a home to live in, investment property is purchased specifically to make money.
There are two main ways property investment makes money:
- Rental Income: Money you receive from tenants who rent your property
- Capital Growth: The increase in your property's value over time
Simple Example
Sarah buys a unit for $400,000. She rents it out for $350 per week ($18,200 per year). After 5 years, the property is worth $480,000. Sarah has made money in two ways:
- Rental income: $18,200 per year × 5 years = $91,000
- Capital growth: $480,000 - $400,000 = $80,000
Total return: $171,000 over 5 years (before expenses and tax)
Key Terms You Need to Know
Before diving deeper, let's cover the essential terminology:
Financial Terms
- Deposit: The upfront money you pay (usually 20% of the purchase price)
- Loan-to-Value Ratio (LVR): How much you borrow compared to the property value
- Rental Yield: Annual rental income as a percentage of property value
- Cash Flow: Money left over after all expenses are paid
- Equity: The portion of the property you actually own
Property Terms
- Investment Property: Property bought specifically to generate income
- Principal Place of Residence (PPOR): Your main home
- Strata: Units or townhouses with shared common areas
- Body Corporate: The group that manages strata properties
How Does Property Investment Actually Work?
Here's the basic process most property investors follow:
1. Save for a Deposit
You'll typically need at least 20% of the purchase price as a deposit, plus additional costs like stamp duty and legal fees. For a $500,000 property, you'd need roughly $120,000-$130,000 upfront.
2. Get Pre-Approved for a Loan
Investment loans have different criteria than home loans. Lenders will assess your income, expenses, and ability to service the loan even if the property is vacant.
3. Find and Purchase a Property
This involves researching areas, inspecting properties, negotiating prices, and completing the legal purchase process.
4. Find Tenants
You'll need to advertise the property, screen tenants, and handle ongoing rental management (or hire a property manager).
5. Manage Ongoing Expenses
This includes loan repayments, insurance, maintenance, council rates, and potentially property management fees.
The Reality Check
Property investment isn't a get-rich-quick scheme. It requires significant upfront capital, ongoing financial commitment, and active management. However, when done properly, it can be an excellent way to build long-term wealth.
What Are the Main Costs?
Understanding all the costs involved is crucial before you start:
Upfront Costs
- Deposit: Usually 20% of purchase price
- Stamp Duty: Government tax (varies by state)
- Legal Fees: $1,000-$3,000
- Building and Pest Inspection: $500-$800
- Loan Establishment Fees: $600-$1,200
Ongoing Costs
- Loan Repayments: Principal and interest
- Council Rates: $1,000-$3,000 per year
- Insurance: $800-$2,000 per year
- Property Management: 6-8% of rental income (if used)
- Maintenance and Repairs: Budget 1% of property value annually
- Strata Fees: $2,000-$8,000 per year (for units/townhouses)
Types of Investment Strategies
There are different approaches to property investment:
Buy and Hold
Purchase a property and hold it long-term, benefiting from rental income and capital growth over time. This is the most common strategy for beginners.
Positive Cash Flow
Focus on properties where rental income exceeds all expenses, putting money in your pocket each week.
Capital Growth Focus
Target properties in areas likely to increase significantly in value, even if rental income is lower initially.
Important Note
This article provides general information only and is not financial advice. Property investment involves significant risks, and you should always consult with qualified professionals before making investment decisions.
What Makes a Good Investment Property?
When evaluating potential investments, consider these factors:
Location Factors
- Proximity to transport, schools, and employment
- Population growth and demographic trends
- Infrastructure development plans
- Rental demand and vacancy rates
Property Factors
- Age and condition of the property
- Size and layout (2-3 bedrooms often rent well)
- Parking and outdoor space
- Potential for future improvements
Financial Factors
- Purchase price compared to similar properties
- Expected rental income
- Ongoing costs and expenses
- Potential for capital growth
Common Beginner Mistakes to Avoid
- Buying emotionally: Investment decisions should be based on numbers, not feelings
- Insufficient research: Not understanding the local market or area
- Underestimating costs: Forgetting about ongoing expenses and vacancy periods
- Over-borrowing: Taking on more debt than you can comfortably service
- No buffer: Not having emergency funds for repairs or vacancy
- Ignoring tax implications: Not understanding deductions and capital gains tax
Your Next Steps
If you're serious about property investment, here's what to do next:
- Educate Yourself: Read books, attend seminars, and use tools like our property calculator
- Assess Your Finances: Review your income, expenses, and borrowing capacity
- Set Clear Goals: Decide what you want to achieve and by when
- Build Your Team: Find a good accountant, mortgage broker, and buyer's agent
- Start Small: Consider starting with one property and learning from the experience
Use Our Tools
Ready to crunch some numbers? Try our Investment Property Calculator to analyse potential investments and see how different properties compare.