How to buy an investment property | Essential guide - NAB
Buying an investment property: what to think through first
Buying an investment property can be a way to build long-term wealth, earn rental income or diversify your financial position. Before you start searching, here are some things to think about:
- Your investment goal such as rental income, long-term capital growth or a mix of both.
- How you’ll fund the purchase including your deposit, borrowing power and whether you could use equity.
- The property type and location and whether it suits the tenants you’re hoping to attract.
- The full cost of owning it including repayments, insurance, rates, repairs, management fees and vacancy periods.
- What could change before you buy such as lending conditions, interest rates, tax settings or local property costs.
Start with an investment goal
Your goal can shape the type of property you look for, where you buy and how you structure your home loan.
You may be aiming for:
- rental income to help cover ownership costs.
- long-term capital growth if the property increases in value over time.
- a balance of both, depending on your budget and time frame.
Tax outcomes may also be part of your thinking, but they shouldn’t be the only reason you choose a property. The property still needs to suit your budget, risk appetite and longer-term plans.
Understand your borrowing position
Check your borrowing power
Your borrowing power is based on factors like your income, expenses, debts and existing financial commitments. It can help you understand your price range, but it’s also worth thinking about what repayments would feel manageable if your circumstances changed.
Plan for your deposit and upfront costs
You’ll usually need a deposit, as well as money for upfront costs such as stamp duty, legal or conveyancing fees, loan costs and any immediate repairs or improvements. If your deposit is smaller, lenders mortgage insurance (LMI) may apply, which can add to the cost of buying.
Consider whether you could use equity
If you already own a home, you may be able to use equity to help buy an investment property. Equity is the difference between your property’s value and the amount you still owe on your home loan. Using equity may help you buy sooner, but it also means taking on more debt. Make sure the extra repayments fit with your broader budget.
Think about your loan structure
Different loan types and repayment options can suit different investment approaches. For example, you may want to compare fixed and variable rates, or principal and interest and interest-only repayments. The right option will depend on your goals, cash flow and circumstances.
Get pre-approval
Pre-approval can give you a clearer view of your budget before you make an offer. It’s not a final loan approval, but it can help you search with more confidence.
Match the property to your investment approach
New build or established property?
A new build may have lower maintenance needs early on and appeal to tenants looking for a modern home. An established property may already have a rental history or be in a more developed area, but it may need more upkeep.
Neither option is automatically better. It depends on the property, location, costs and your investment goal.
What to look for in a location
Location can affect rental demand, vacancy periods and long-term growth. When comparing areas, consider:
- access to transport, schools, shops and services
- local employment opportunities
- population growth and planned infrastructure
- rental demand and vacancy rates
Rental return and long-term growth
Some properties may offer stronger rental income. Others may appeal more for long-term capital growth.
If your focus is income, rental yield and vacancy rates may matter more. If your focus is growth, you may place more weight on location, demand and future development in the area.
Allow for costs beyond the purchase price
Before buying an investment property, factor in the costs of owning and managing it, not just the purchase price and loan repayments.
These may include insurance, rates, strata or body corporate fees, repairs, property management fees and periods without rental income. Allowing for these costs early can help you understand whether the property is affordable over time.
For more detail, read our guide to investment property costs.
What can change when you’re planning to buy
Even if the property stays the same, the numbers around it can change. Before making an offer, it’s worth checking whether your plan still works.
If tax or government rules change
Rules that affect property investors can change over time. This may affect deductions, ownership costs or what happens if you sell later. Tax can be complex, so consider getting professional tax advice if you’re unsure how the rules apply to you.
If lending conditions or interest rates change
Changes to rates or lending conditions can affect your borrowing power, repayments and the buffer you may want to keep. If your borrowing position changes while you’re searching, you may need to revisit your budget, location or property type.
If costs or rental assumptions change
Your plan may also change if local rents, vacancy rates, insurance costs, strata fees or repair costs shift. If you’ve been searching for a while, check whether your assumptions are still realistic before you commit.
What to check before you make an offer
Once you’ve found a property that may suit your plan, take time to check the details.
Review your budget and pre-approval
Make sure the property still fits your budget and borrowing position. If your pre-approval was arranged earlier, check whether anything has changed.
Understand the sale process
Private sales and auctions work differently. With a private sale, you may be able to negotiate price, conditions and settlement timing. At auction, you’ll need to be ready to sign the contract and pay the deposit if you’re the successful bidder.
Arrange building and pest inspections
A professional inspection can help identify issues that may not be obvious during an open home, such as structural problems, pest damage or repairs.
For a private sale, you may be able to make your offer subject to inspection. For an auction, inspections are usually completed before bidding because the sale is generally unconditional.
Check if the property is tenanted
If the property is already tenanted, check the lease, rent, bond and property management arrangements. If it’s vacant, allow for the time and cost of advertising, finding tenants and preparing the property for rent.
What happens after settlement
Settlement is when the property legally transfers to you. From there, you’ll need to decide how the property will be managed.
You can manage it yourself or use a property manager. It’s also important to keep clear records of your property income and expenses. These may be useful at tax time and if you sell property later. If you sell your investment property in the future, capital gains tax may apply depending on your circumstances.
Ready to purchase your investment property?
Speak to our home loan experts and get started on your investment property buying journey.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
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