Real properties remain great investments in Australia, especially in the current buyers market. As an investment strategy, real property presents various advantages over other types of investments such as stocks, bonds and bank deposits. However, raising enough cash for purchasing investment property can be a challenge for beginner investors. Ideally, a financial planner or mortgage broker should be able to help a prospective buyer learn how to finance investment property.
Benefits of investing in property
Financial freedom: The right property investment coupled with the best financing arrangements can generate huge profits for an investor. These can be used to finance other investment properties that generate similar incomes sufficient to sustain the desired lifestyle of an investor.
Passive income: Property situated in populated areas such as major cities and tourist destinations can generate regular passive income in the form of rent or lease payments.
Capital growth potential: The value of property is historically known to increase much faster than the economy's inflation rate. Properties in prime locations are known to appreciate in value at the minimum rate of 7% annually. An investor stands to earn higher profits from selling property held for a long period.
Control over value: Unlike other types of investment such as shares of stock, bonds and deposit accounts where an investor has very little control over their future values, property investment may be improved, renovated, subdivided, developed or consolidated to improve its market value.
How to finance investment property
Potential gains from an investment property depend on the features of its financing arrangement. Not all investment properties are purchased in cash. Investors generally put up a down payment and finance the remainder value using a loan or mortgage.
Mortgage loan: A mortgage is a loan where property, usually the property being purchased, is given as security for the loan's repayment. Interest costs for a mortgage loan are generally lower because the collateral lowers the lender's risk.
Home equity as deposit: Producing a down payment for a property investment can be a challenge for investors with limited cash. An option would be to use a property's equity as deposit. Equity refers to the value of an asset that is not subject to any lender's interest. In practical terms, it is the difference between the current value of a property and the amount due on a mortgage loan secured by it.
Lending companies provide different loan products with varying features such as interest rates and repayment schedules. Each financing arrangement has its own pros and cons. Aside from teaching you how to finance investment property, a mortgage broker or financial counselor can help you determine the best arrangement for your situation.