Insights · Property and lending
Buying your first investment property
An investment property can build wealth over the long term, but the decisions you make before you sign, about the property, the loan and the ownership, matter far more than the timing. Here’s a checklist for doing it properly.
1. Are you ready?
- Your own finances are in order: stable income, an emergency buffer, and no high-interest debt.
- You can afford the shortfall between rent and costs for several years, including if interest rates rise or the property is empty for a while.
- You’re investing for seven to ten years or more. Property costs a lot to buy and sell, so short-term investing rarely works.
2. Work out what you can borrow
Lenders assess your income (including expected rent, usually discounted), your expenses and your existing debts, at an interest rate higher than you’ll actually pay. Different lenders give different answers, especially for self-employed borrowers and people with several properties. Judge Lending can compare them and arrange pre-approval.
Using equity: if you own your home, a separate loan secured against it can fund the deposit and costs. Keep it separate from your home loan so the interest is clearly deductible.
3. Budget for the full cost
On top of the deposit: stamp duty (investors don’t get first home buyer concessions), legal and conveyancing fees, building and pest inspections, loan costs, possibly lenders mortgage insurance, and an allowance for initial repairs or furnishings. Then the ongoing costs: interest, rates, strata, insurance, management fees, maintenance and land tax once your land holdings exceed the threshold.
4. Choose the property for the long term
What matters most for an investment is what tenants and future buyers will want: location, transport, schools, employment, and limited new supply nearby. Look at vacancy rates and rental demand, not just the price. Be wary of anything sold mainly on its tax benefits, rental guarantees or “off-market” urgency.
5. Decide who owns it before you sign
Ownership can be in your name, jointly, through a family trust, a company, or your SMSF. Each has different consequences for tax deductions, tax on rent and on the eventual gain, land tax and asset protection. Changing it later usually triggers stamp duty and capital gains tax, so decide before the contract is signed.
6. Set up the loan properly
- Separate loans for separate purposes, never mixing private and investment borrowing.
- Interest-only or principal and interest depending on your whole debt position. If you have a home loan, paying that down first is usually better, because its interest isn’t deductible.
- An offset account against your home loan rather than paying extra into the investment loan.
See investment and SMSF loans and types of home loans.
7. Run the numbers
Estimate the rent, all costs, depreciation and the tax effect, then the after-tax cash you’ll need to contribute each year. See the worked example in negative gearing explained. A property only makes sense if the expected growth outweighs that ongoing cost.
8. Get the tax set up from day one
- Order a depreciation schedule from a quantity surveyor. See depreciation on new and established properties.
- Keep every record from the purchase onwards, for deductions now and capital gains tax later.
- Consider a PAYG withholding variation to get the tax benefit in each pay.
9. Protect it
Landlord insurance, a good property manager, a clear lease, and a maintenance budget. Also review your own life and income protection insurance, since you’ve taken on more debt.
Do it with your accountant and broker together
The best outcomes come when the loan, the ownership and the tax are planned together before you buy. Judge Lending and your Judge accountant work in the same office. See investment loans.