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Real estate investment is generally viewed as a lucrative career opportunity. But purchasing investment property does require a significant financial backing. Nowadays, however, the funds required to embark on a real estate investment career are easily accessible to many people in the form of an investment property loan. Therefore, you may begin investing in real estate, even if you are on a shoe string budget.
Investment property loans can be broadly classified into two categories, namely residential and commercial. Residential loan is associated with those investment properties whose predominant use is residential, and that are purchased for future appreciation and rental income. On the other hand, commercial loan is acquired for the purchase of apartment buildings (with 5 or more units), warehouses, or stores.
An investment property loan can be obtained from several sources, including banks, financial institutions, credit unions, and private brokers. These lending institutions analyze a borrower’s credit score, income and assets, in order to determine if he/she is a viable candidate for an investment property loan.
A multitude of real estate investors in the US make use of an investment property loan to acquire real estate. Doing so offers them a twofold advantage – they can enjoy the benefits of capital growth and tax deductions. Though the escalations are not anywhere near the boom of the late 1980s, property value does appreciate on a gradual basis (capital growth). Another significant benefit is that offered by “negative gearing”.
Gearing, in essence, refers to borrowing in order to invest. A negatively geared investment property is one that is purchased using borrowed funds and where the income (after expense deduction) from that investment is less than the payable interest in the course of a year. This allows a significant tax benefit for investors, as they may deduct the expense of owning an investment property (especially the interest on the investment property loan) from their taxable income.
Investment property loans come in various shapes and sizes, as per the requirements of investors. They are offered as interim, short term or long term loans. Needless to say, you must ensure that you are well aware of the terms of the loan, such as the interest rate, the time period of the loan, and the payment schedule.
In a gist, newbie investors need not have plethoric amounts of money to set out on a career in real estate, since property investment loans offer a great opportunity for them to get their feet wet in real estate.

My husband and I are thinking of purchasing an investment property by way of using a home equity loan on our first home. Is this a smart thing to do? what are the down sides of it? We don’t have money of our own in the bank to do it, but it seems like a good time to take advantage of the changing real estate market.

I recently decided the time was right to utilise some surplus cash I had available and began looking to purchase an investment property. Whilst it would have been easy to just dive in and find something that I could afford regardless of the location or potential growth, I thought it best to do some research knowing that my investment property was more than likely going to be a long term property investment for me. Timing was also good from an income perspective –I good easily demonstrate my capacity to service the investment loan I would need to complete the purchase and negatively gear the property. The “cost” of my investment loan after tax benefits were taken into account were considerably reduced. When I began to think carefully about purchasing my investment property, I took such things as what economists were predicting as far as growth and property value increases as well as expenses that I would incur, both now and ongoing. This was definitely a decision I had to make with my head and not my heart. I also considered what was happening in the investment loan scene particularly in relation to features of an investment loan that could be advantageous for me as well as the general interest rate environment. On the property front, my first port of call was to view the recent BIS Shrapnel report noting that by mid-2011, the median Sydney house price will climb from $560,000 to $650,000 – A senior economist at the firm, Jason Anderson, said the price rise would be spread across the city, helping cut the gap between Sydney’s two-speed property market. This was quite encouraging and meant that I could now look at a vast array of locations for my investment property. Whilst deciding on a local property, I also looked at the opportunity to perhaps purchase an investment property interstate, which is definitely something prospective buyers should focus on. As far as investment loan product was concerned I checked out a number of mortgages until I found one that included a capitalising interest component. I wanted to make sure that in the event that I had surplus personal income I could apply as much as possible of this to my home loan repayment as opposed to subsidising my investment loan repayments. A capitalising feature in an investment loan also gives me some protection in case of unexpected maintenance costs on my investment or a prolonged vacancy. The next important issue I had to consider when deciding on an investment property was the cost associated with the purchase. There were the up-front costs such as loan fees, legal fees and government charges as well as the ongoing costs such as maintenance costs, real estate agent’s fees (rent collection), loan repayments, government taxes, etc. From a discussion I then had with my accountant, I discovered that as this was to be an investment property, most of the costs associated with the purchase, both up-front and ongoing, were tax deductible, either in the year I incurred them or in some cases they had to be spread out or amortised over a 3 or 5 year term. I also checked out the possibility of borrowing these costs within my investment loan. This is always a possibility but I discovered that if your investment loan exceeds 80% of the purchase price then the costs increase – basically it did not seem worthwhile to take my investment loan past 80%. I did realise however that if I included my home property as security for the investment loan (I had quite good equity in my home) then this meant that I could borrow 100% + costs on the purchase within the investment loan. This again meant that instead of applying my savings to the investment purchase (and taking a smaller investment loan) I applied this to the reduction of my non-deductible home loan debt and increased my investment loan debt. Increasing the investment loan like this was much more tax efficient for me. Having done my own property research and having sourced an excellent investment loan I now felt at ease with my decision to go ahead and start to look in earnest for a property. I am now the proud owner of an affordable investment property that I negatively gear for taxation purposes through my investment loan. With the help of a reputable non-bank home loan provider, I have structured my home and investment loans to maximise my tax benefits. When thinking about purchasing an investment property and looking for an investment loan it would always be advisable to thoroughly research the current real estate market, source qualified information about where the market is heading both locally and interstate as sometimes this may be a more profitable option and finally, speak to qualified financial consultants as this could potentially save you thousands when claiming deductible expenses. And don’t forget to make sure your home and investment loan are structured properly so that you are minimising your tax bill as much as possible.

As discussed in Part I there are many astute property and share investors in Australia who often fail to ensure that the investment loan they take offers the best available features and most tax efficient investment loan structure for them.When considering an investment loan you should ensure that you maximise your investment loan and that the interest rate is competitive (but not necessarily the cheapest – do not sacrifice features for interest rate); you should take the investment loan on an interest only basis and apply any surplus cash you have to the repayment of your non-deductible (your negative gearing benefits are maintained); you should not mix your investment loan with your home loan debt because the Australian Tax Office requires that any additional repayments of principal to such a “mixed” account must be apportioned between the home loan and the investment loan (your negative gearing benefits on your investment loan will reduce as a result).Another feature that all investors should include in their investment loan is a separate capitalising investment line of credit. The line of credit should be for a 10 year term minimum and be interest only. The importance of a capitalising line of credit within your investment loan structure cannot be underestimated. By having such a facility including in the investment loan you protect yourself form unforeseen vacancies and expenses in relation to the upkeep of your investment property. In a recent private ruling issued by the ATO a taxpayer was provided with a favourable outcome when he sought confirmation from the ATO that where he held an investment loan and the rental income did not cover his investment expenses (interest, costs, rates etc) then he could capitalise interest on an investment line of credit where the line of credit was used to meet the shortfall between his investment income and his investment costs (interest on the investment loan being a large portion of this. The taxpayer also had a home loan and advised the ATO in his private ruling application that he did not want to use his personal income to subsidise the shortfall (including the interest on his investment loan) that he was having to meet each month. Rather he sought to draw down on the line of credit within his investment loan facility to meet the shortfall and apply as much of his personal income to the repayment of his personal home loan debt.Under the line of credit he was not required to make any payments to the investment line of credit so the debt increased. The interest also increased with the result that the taxpayer could deduct the simple interest on the investment loan as well as the simple and capitalised interest on the investment line of credit. This delivered additional negative gearing benefits to the taxpayer while also saving him significant dollars on his home loan debt. By applying more of his personal income to repay personal debt he reduced his home loan term by 8 years and saved himself many thousands of dollars in the process.Make sure you include a capitalising line of credit within your investment loan structure – you have both protection (from vacancies, higher interest rates,unexpected costs) as well as the opportunity to increase your negative gearing benefits and reduce your home loan interest! Make your investment loan work for you and improve your investment return.

If you have a home loan but also equity in your home property and want to purchase an investment property to build wealth, then it is important to research the investment loan market to make sure that you apply for an investment loan that really works for you. When you apply for an investment loan, most lenders will simply offer you their standard term investment loan. Quite often they will seek to structure the investment loan so that it is on a principal and interest basis. While ever you have home loan debt it is much better to have an interest only investment loan. This ensures that the repayments you make on the investment loan are the minimum possible as opposed to including any principal reductions. If you apply any principal amount that you would otherwise have made on a principal and interest investment loan to the repayment of your home loan you will repay your home loan much faster and save yourself a heap in interest payments. There are also the tax considerations – if you do not reduce your investment loan debt then you do not reduce the amount of deductible interest you can claim each year. Your negative gearing position is maintained as opposed to diminishing each year. Ideally an investment loan will also include a capitalizing line of credit so that you can have a buffer during high interest rate times or when there are unexpected vacancies or costs relating to your investment property. By including a capitalising line of credit within your investment loan you are also in a position where if you wished or need to you could capitalise the shortfall between the rental income you receive and the outgoings you incur (including the interest on your investment loan). This shortfall is added on to the investment loan instead of being met from your personal income. By not having to subsidise the shortfall in interest on your investment loan you have freed up your cash flow. The most efficient way to use this freed up cash flow is to apply it to an additional repayment on your home loan. You may not realise but if you were to capitalise a monthly shortfall of interest on your investment loan of say $350 (rather than pay from your salary) and instead applied that $350 to the repayment of your home loan of $150,000 (@ 9.25% over 30 years) then you would repay that home loan out in less than half the term (in 14 years and 2 months to be precise) and by doing so save your self almost $175,000 in interest repayments to the bank. Many investors when looking for an investment loan do not properly research the market and accept whatever is offered to them by their bank. This approach can be costly in the long run. Check out the other investment loan options in the market and look to a lender who understands your investment needs and can provide you with an investment loan that gives you a lot of flexibility, is priced competitively and defintiel includes a capitalising interest feature. It is also helpful if your lender is able to issue separate statements for each investment loan you have and your home loan. Some mortgage managers also give you the ability to name each account e.g. 16 William St making for easy identification of each investment laon for you, and your accountant at tax time. Be an astute investor and look for an investment loan that offers these sort of features as it will help you reach your wealth building goals much quicker.

I am a small businessman, who really tries to start a own business but fails at finding the fund or investment for it. It really is hard for me to find it. Please help for useful tips and strategies.

Why invest and why take out an investment loan? People’s needs for investment are as varied as the investment vehicles themselves. Some want to own their home outright, pay the kids’ university fees, or take world trips; while others want to start their own business or retire on a comfortable income. The reality for most of us is that we won’t be able to afford these things on our salary alone (unless you’re fortunate enough to be the CEO of a major corporation). The key to successful investment is to leverage, that is, to use an investment loan to improve your capacity and increase your return. Why invest in property? Investing in property is the safest way to invest, but we also believe in a diversified portfolio to minimise risk. Similarly, Australians have trusted investment property as their favoured investment vehicle for generations – and with good reason. We recognise the cycles, the incredible advantage that appropriate leverage (making capital gains from borrowed funds) offers, the benefits of rent return and taxation relief in servicing those borrowings, and the significant growth achievable over time. It is not unusual for ordinary investors to accumulate four or more properties over 10 years – and the financial flexibility and cash flow outcomes can be exceptional, giving you piece of mind. Property allows you to leverage. With only $20 000 cash invested (plus around $10 000 upfront costs) it is possible to invest in a $200,000 property, making your earning potential greater. Can you afford to invest in property? The question should really be, “can you afford NOT to invest”, whether it be in investment property or some other form of investment? While everyone should be investing to give them more options in life, property investment may not be suited to everyone. Most people on a standard wage can service an investment loan. After all, the investment loan interest is first met by any rental income you generate. As a general rule there will only be a small shortfall on the interest on your investment loan. Traditionally the investment loan shortfall, as well as other costs relating to your investment property would be met by your personal income. Many investors however include a capitalising line of credit in their investment loan package so that they can draw on this to meet any shortfall costs as opposed to paying same from their personal income. Instead, they use as much of their personal income as possible, not to pay any shortfall interest on the investment loan but to make additional repayments to their home loan. This way their home loan is paid off much more quickly. With your investment loan you should also remember that negative gearing does deliver some relief to servicing your investment loan on the way through. While most investors will wait until the end of the financial year to claim their tax deductible shortfall you can in effect claim the investment loan shortfall on a monthly basis. Check out the ATO website on deductibility of interest on investment loans. What history can tell you about property History shows us that all property whether it be investment or owner occupied doubles in value every 7 to 12 years. Each property market is cyclic, that is, it goes through times of fast growth followed by little or no growth. When one market eg Sydney is in strong growth, other markets eg Brisbane will be in a little or no growth phase. The markets are referred to as being counter cyclic – when one is doing well, another is doing not so well. This means for example that when the Sydney’s growth slows, Melbourne’s picks up followed by Brisbane. This is the reason we emphasise the importance of investment property as a mid to long term investment. The key however is to identify the markets with the highest probability of short to medium growth and lowest probability of downside risk. This enables you to build equity faster and therefore add to your investment property portfolio. It also means that there are always new opportunities for investment property as there are always markets somewhere which are experiencing their growth phase. Choosing investment properties in growth markets assists in developing well-balanced, diversified portfolios. Property in the futureIn the past all property was good investment property, and a lot of people did very well out of it. While those days are gone, there are still exceptional opportunities for investors who understand the current market influences such how our population is changing, how family size is changing, how types of employment are changing, and how the economy is changing and what influences it. So why wait? Research property – buy with your head not your heart – be an informed purchaser and most importantly make sure your investment loan is also working for you.

An investment property is becoming a more popular choice for those seeking to create a revenue stream and also achieve capital growth through the investment property value increasing over time. This can also be part of a strategic financial plan and should be considered by investors as part of a diversified portfolio. When considering an investment purchase you should also source the best investment loan structure for you. With any investment your investment loan can make a difference to your return. If you are negatively geared through an investment loan the cost to you of that investment loan can effectively be reduced. If you purchase wisely, once there has been capital growth in the investment property over time there is the option of using this built up equity to move into another investment property, take out another investment loan and thereby continue to further increase your investment portfolio. Aside from the traditional belief that tax advantages are the key driver for taking out an investment home loan there are many other factors to consider when purchasing an investment property. Below are some key points for your reference, by using these points as a guide in conjunction with a detailed discussion with your accountant or financial planner you will be in a better position to ensure your investment purchase and investment loan is a financially sound decision for the long term. In relation to property enquiry therefore, you should consider: * What is the infrastructure like in the area? Are there enough schools, hospitals, shopping centres, doctors and dentists, freeways or main roads? * What has the historical capital growth been in the area over the last two decades? * Is the local council planning to increase housing density or add a new road to increase traffic flow? * If you are purchasing in a new subdivision, are there more new land blocks and house and land packages planned nearby. New developments can impact on the value of your home as purchasers often prefer a new home to one that might be 2 or 3 years old in the same area. * What length of time will the investment be held? And will this tie in with planned infrastructure development which will in turn accelerate capital growth? There has been recent press to suggest that investment and home property values in Sydney have a potential capital growth of 18% over the next 3 years so buying off the plan as an investor may be an attractive option in the current market. If you find a good property development, suitable for investment, which has a completion date in say 2010 – 2011 then you can exchange contracts with either a 10% cash deposit or a deposit bond (as a guide the cost of a deposit bond of around $86500 for say settlement September 2011 will cost you approximately $9000- $9500 (significantly less than the interest you would pay over the period if you borrow $86,500 at current interest rates of 9% p.a). The general feeling is that direct investment into property as opposed to into managed property funds is a better way to go – you are in control of your investment and avoid the high management fees so often charged by share and property investment funds. Do some research on the internet to see which areas have the greatest potential for capital gains – remember if you are looking for an investment property you should invest with your head not your heart. An investment property needs to be well located to transport and other facilities so that those renting can easily access these services. When considering which investment loan would suit you best take the following into account: 1. Does the investment loan allow you to split it into a number of investment loan accounts. This is a good feature to have in an investment loan because you are positioning yourself for the future – if you use the investment property at a later date to gear into another investment purchase then you can split the account so that the investment loan portion relating to the new purchase is clearly identified. This allows you, and your accountant, to easily track the costs associated with the new purchase. 2. If you use your home property (with an existing home loan) as security for the investment loan then it is imperative that you do not mix any home loan debt with your investment loan borrowings. The ATO in Australia requires you to apportion any additional repayments to a loan where the borrowings are “mixed”. You want to apply any additional repayments to your home loan before your investment loan. You are paying your home loan off in after tax dollars – whereas you can deduct the interest you are paying on your investment loan against the income form the investment property. 3. Does the investment loan allow you to capitalise interest? It is always a good idea to include a capitalising feature as a part of your investment loan to protect you against any unexpected costs in relation to the property. It also means that instead of subsidising the investment costs and interest shortfall on your investment loan you can capitalise these and make additional repayments to your non-deductible home loan debt. 4. If you have sufficient equity in your home then you may be better to consider a 100% + costs investment loan for the investment acquisition and use any savings you intended for the investment purchase to pay down your home loan debt. If you consider all these points your investment loan will be working in your favour at all times.