Buying an investment property
From first investment to a portfolio: how lenders assess you, how to structure the loan so it does not block the next one, and the order to do things in.
The first investment property is mostly a lending decision, not a real estate one. Get the structure right and the second and third are easier; get it wrong and you hit a borrowing wall in year three. This is the sequence we walk clients through in Geelong and Melbourne’s west.
Know your borrowing capacity for investment
Lenders assess investment loans differently: rental income is counted at 70% to 90%, negative gearing benefits may or may not be included, and the rate buffer (3% above the actual rate) applies to every loan you hold. We model your capacity across the panel, because it can differ by $100,000 or more between lenders.
Decide where the deposit comes from
Cash, or equity in your home. Equity release is usually the cheaper path: a separate split against your home for the deposit and costs, and a new loan against the investment property. Keeping them separate keeps the interest deductible and the properties unlinked, which matters if you ever sell one.
Pick the structure before the property
Interest-only or principal and interest, fixed or variable, offset placement, and whose name the loan is in (which follows the ownership and the tax advice). Talk to your accountant on ownership; we handle the lending side and make sure the two agree.
Get pre-approved and buy
Same process as a home purchase, with a lender chosen for its investment policy, not just its rate. Watch for lenders that cap investment lending or apply higher rates above 80% LVR.
Settle, then set up the running costs
Landlord insurance, a property manager, a depreciation schedule for tax, and an offset account attached to the loan for the rent to land in.
Review every 12 months
Property values move, rates move, and your capacity moves. An annual review is how the second property becomes possible: it tells you when there is usable equity and whether the current lender is still the right one.
The mistakes we see most
- Cross-collateralising the home and the investment with one lender, then being unable to move either
- Using cash for the deposit when equity would have kept the interest deductible
- Choosing the cheapest rate from a lender whose servicing calculator caps you out for the next purchase
- Buying an SMSF property through a standard loan (it needs a limited recourse arrangement; see SMSF loans)
Common questions
Can I use my home’s equity without refinancing the whole loan?
Usually, yes. Most lenders allow a separate equity split, or a top-up, without disturbing your existing rate or fixed period.
Interest-only or principal and interest?
Interest-only maximises cash flow and deductions but costs more over the life of the loan and is assessed harder. Principal and interest builds equity faster. The answer depends on your tax position and your next purchase, which is why we ask about both.
Common questions
How much deposit do I need for an investment property?
Typically twenty percent to avoid LMI, though smaller deposits are possible with LMI added to the loan. Many investors draw on equity in their existing home rather than cash savings, which changes the structure of the lending rather than removing the deposit requirement.
Do lenders count rental income?
Yes, but not all of it. Lenders usually discount the expected rent to allow for vacancy and costs, and they assess the loan at a buffered rate. That is why investment borrowing power is often lower than investors expect.
Should I use interest-only repayments?
It depends on your tax position and your plans, and it is a question for your accountant as much as your broker. Interest only lowers repayments during that term but costs more across the life of the loan, and lenders assess it more conservatively.
Thinking about a first investment?
Bring your current loan statement and a rough budget. We will show you your investment borrowing capacity across the panel and the structure that keeps the next purchase open.