While interest rates are still relatively low, and the activity of first home buyers has slowed, it is the perfect time to consider starting, adding to or stepping up your property investments. However, simply because the market is more affordable and less competitive, doesn’t mean you can be lax in ensuring you maximise your investment returns, and one of the most important and influencing factors in the size and health of your returns is the investment loan you choose, and how you use it.
Following are six considerations, comparisons and features you should know about, before you choose an investment loan, to make sure you maximise your returns.
1 Know your needs
It makes sense that you need to know where you are going before you can work out how you're going to get there and the same is true for maximising the returns on your property investment. Therefore consider what you want to get out of your investment and when; for example if you want your investment portfolio to be positively or neutrally geared so that your rental income covers the cost of your repayments to ensure less financial risk and outlay, finding the lowest interest rate may be your priority. Or you may prefer to manage your repayments by choosing a fixed interest rate so that you know what to expect from your investment loan commitments each month.
2 Know what you can afford
Knowing what you can afford comes down to calculating the investment loan repayments you can meet, as well as how much help you will have in meeting those repayments from your rental income. You need to be realistic about your budget and about the investment property you choose, because just as you're sure to know homeowners who believe their properties are worth much more than they really are, property investors can fall into the same trap.
Instead, make sure you know what you can afford in terms of repayments, and whether your property is going to be affordable for your tenants. There is little point in buying a property as an investment to rent out, if you overcapitalise for the area in which you have bought and you are unable to attract good tenants, or tenants who are willing to pay the rent you are asking. In this instance you may have bought a property for which your rental income falls far short of your investment loan repayment, and short of a maximum return.
3 Interest only repayments
Most investors will be advised to make interest only repayments on their investment loan, as you normally do not intend to repay the loan to keep the property, but instead are likely to sell and upgrade your investment, at which time the sale price of the property goes to repay the principal amount, and your interest repayments have been tax deductible, where a principal repayment would not be. Also when you are making interest only repayments the rental income you receive more closely aligns with your monthly outlay and maximises your investment returns.
To find the best interest only option on your investment loan make sure you shop around because typically home loan providers will offer interest only periods of around five years, however there are financial institutions which are now offering interest only terms of up to 10 years which can mean you are making less of a financial commitment to repay your investment loan, and those funds saved can go towards other investments or living expenses.
4 Investment line of credit
Investment loans can give you the option of a line of credit feature, where the value of the equity in your investment property is made available as a line of credit for you to access. You do not have to make repayments on a line of credit until all of the available credit has been drawn down, so the funds are available in your investment loan account if you need to cover repairs, or repayments during the period where your property is vacant. An investment loan line of credit is an important feature in maximising your investment returns because a well maintained property is more likely to attract good tenants who want to keep your property in its good condition, plus you don't have to dip into your personal funds for investment expenses. It is important to maintain that boundary between personal and investment funds and make sure to not use your investment line of credit for personal expenses as this can compromise the tax benefits you are entitled to as the loan would then be considered a combination loan.
5 Offset account
If you do not want the temptation of a line of credit available on your investment property you can get similar benefits from using an offset account linked to your investment loan. An offset account allows you to keep other funds, in this case possibly income or returns from other investments, in the account to offset the interest charged on your loan. For example if your investment loan is $250,000 and you have $50,000 in your offset account you only pay interest on $200,000, which can save you in monthly repayments especially if you are making interest only payments.
You can also use the funds in your offset account to cover repairs and maintenance on your investment property or meet repayments while you look for new tenants.
6 Interest only in advance
If you have a fixed interest rate investment loan, some providers will offer you the option of paying your interest in advance up to 12 months, in return for receiving a discounted interest rate. When you consolidate your investment loan repayments into one lump sum you can also maximise your tax benefits.
For example, you already know that you can claim the interest you pay on your investment loan back from your tax. If you pay your interest in advance, paying a full 12 months for the first financial year you have your investment property before 30 June of the current year, you can then claim all of that interest in the first tax return you submit after investing in property. However if you were to pay your interest in weekly, fortnightly or monthly repayments you would have to wait until the second year before you can claim your interest as a tax deduction. As a result you can be paying less interest because you are getting a discount, but actually claiming more because you can claim sooner.
Maximising the returns on your investment property is about understanding that the features you choose and the way you repay your investment loan, are just as important as choosing an investment property in a growing area where you will be able to attract tenants who are both willing to meet the rental repayments and look after your property as though it was their own.
This article was written by William Eve. William writes for Home Loan Finder, a home loan comparison site offering a range of competitive investment loans and strategic guidance for investors and home buyers
