Interested in residential real estate investing? Here are our top tips.

Self-Employed | 24 May, 2023

Investing in residential real estate is generally regarded as a pretty safe long-term investment. But, like any investment, it has its risks as well.

So to successfully engage in residential real estate investing, it’s important to be well informed and well prepared. As finance brokers, we’ve a lot of experience in the local market helping our customers with real estate investing in the residential market. Here are our top tips.

Our top tips for residential real estate investing

image of a small blue cottage with a bright yellow door and white picket fence demonstrating residential real estate investing

When you’ve worked hard to build equity in your own home and put yourself in a position to build wealth through residential real estate investing, it’s important to keep a cool head and engage in the process ‘eyes wide open’.

Tip 1 – Know your budget

The foundational step in getting started in residential real estate investing is to know your budget. Consider how much you can allocate towards the purchase price of an investment property. And then think about all the associated and ongoing costs that might come up as well. These could include property inspections, stamp duty, legal fees, rates, insurance and mortgage repayments.

Tip 2 – Know your investment goals

It’s important to also be clear on your goals for residential real estate investing, so you allow yourself sufficient time for your goals to be realised. Questions to consider can include:

  • Are you steadily building a nest egg for retirement?
  • Do you need fast capital growth and a quick sale?
  • Are you purchasing an investment property for family members to live in at minimal rent?
  • Will you need to spend considerable money to renovate your investment property? And will you do much of that work yourself or need to hire expert tradespeople?

Get expert advice before negatively gearing

Negative gearing can happen when the costs of owning a residential investment property outweighs the income that it generates for you. For example, if your rental income is less than the interest on your investment loan. In some situations this can lead to a taxable loss.

It’s always a good idea to understand the tax and cashflow implications of any investment property. Speak to your accountant about these issues before investing in any residential real estate to ensure you understand the issues fully and are properly prepared for the outcomes.

Tip 3 – Do your property research

Put the time in to research the areas in which you would like to invest in residential real estate. Aim for areas where there is a strong, steady demand for rental accommodation. And one that’s ideally close to transport routes, schools, shops, healthcare and other services.

Another great place to consider investing in residential real estate is a well-supported tourist area. But be wary of boom/bust destinations. These are those areas that are experiencing a lot of growth but only in the short term – perhaps due to the influx of one industry. The key is to ensure that there is more than one tourist industry in the area you’re considering.

It’s a great idea to engage a buyer’s agent to help you research the best options in your preferred suburbs.

Tip 4 – Be prepared to leverage your existing equity

Be prepared to leverage the existing equity on your home. Your equity is the difference between the value of your property and the amount remaining to be paid on your mortgage. Lenders will typically cap the amount of equity you can access at 80%, to give them a buffer against market fluctuations.

It’s a good idea to leverage this equity about three months prior to residential real estate investing. By being prepared in this way, you will know how much equity you are able to access to invest in residential real estate. If you’re not certain of where you’re currently sitting with your mortgage, a home loan health check could be timely.

Consider mortgage pre-approval

Part of being financially prepared for residential real estate investing can be considering mortgage pre-approval. We wouldn’t recommend seeking pre-approval unless you are absolutely sure of your timeframe. Pre-approvals only remain valid for three months.

Before you take the plunge, rate your readiness. We generally recommend that you rate yourself as an 8 out of 10 before taking the plunge and committing to pre-approval.

Tip 5 – Think about different lenders

Be aware that your loan for residential real estate investing could be with a different lender from your existing home loan lender. This could be for policy reasons, risk management reasons or due to borrowing capacity.

Tip 6 – Avoid cross-collateralisation

image of two small houses, one white and one red with a double sided black arrow going between them to demonstrate residential real estate investment cross collateralisation

If possible, each of your properties should stand alone and not be cross-collateralised. Cross-collateralisation is when one loan is secured by two properties.

The benefit of cross-collateralising is that you could use the equity in your existing home to borrow the full purchase price of an investment property from the same lender. However, it’s not something we generally recommend.

When you cross-collateralise, your properties would be ‘tied together’ securing the same loan. It reduces your flexibility in being able to separately deal with the properties. And as they are ‘linked’, you risk losing both properties if you ever have trouble in making your loan repayments.

Instead, where possible, we recommend seeking an equity release against your home in order to get a 20% deposit available for the investment property. You would then enter into a separate loan for the remaining 80% which would be secured by the investment property.

Ideally the investment loan will be with a different lender than your home loan. However, if you do need to borrow from the same lender, we can still structure the investment loan to be with the same lender, but to be completely standalone.

Tip 7 – Keep a cool head

When getting started in residential real estate investing, it can be easy to make decisions with your heart rather than your head. Real estate investment can be emotional, as you’re swept up in the potential of a property or what it can mean for your future nest egg.

Keep a clear head as you work through each of our tips and put them into practice. You’ll need to weigh up the pros and cons of each potential property. And always get building and pest inspections done by qualified operators on any investment property, so you are fully aware of any potential issues.

We’re here to help!

If you’re looking to get started on or continue your journey in residential real estate investing, get in touch. We can help you with a home loan health check, leveraging the equity in your existing home and planning your budget for investing.

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