With your first home purchase tucked firmly under your belt, you’re probably feeling a lot more confident about the property buying process. Maybe, you’re even thinking about investing in a rental property.

You certainly wouldn’t be alone. Buying a property to rent out is a popular choice of long term investment, and 1 in 10 (11%) Australian adults, or just over 2 million people, own an investment property.

Part of the appeal of owning a rental property is that interest on the investment loan is normally tax deductible. A wide variety of other costs associated with managing and maintaining an investment property may also be claimed on tax. If the property is “negatively geared”, meaning the costs of owning the property exceed the rent it produces every year, the loss can often be claimed against your regular income.

The tax savings this can provide together with the rental income you receive, could make owning an investment property an affordable option.

Things to consider before investing in property

Along with the potential pluses of owning an investment property, there is also plenty to consider to be sure that being a landlord is right for you.

As a starting point, think about whether you could handle the costs of owning a second property. As a landlord you’ll be responsible for a variety of expenses relating to your rental place. These can include land tax, council rates, insurance, property marketing, water bills, strata (for units) and the upkeep of the property including repairs as well as regular repayments on your investment home loan.

If there is a shortfall between the rent you receive and these outgoings, consider how long you could afford to make-up the difference – particularly if the property is vacant for any period.

Also look at how well an investment property fits into your lifestyle. Do you take time to manage a rental place yourself or is it more likely you will need to pay a property manager to take care of the property on your behalf? This is another cost you’ll need to budget for.

Financing your investment property

If, after working through these considerations, you’re still keen to invest in a rental property, the next step is to look at how you will fund your investment.

As a home owner you may have built up some equity in your current property, and it may be possible to use this home equity in lieu of a cash deposit for your rental place. However, you may still need cash savings to pay for upfront purchase costs like stamp duty and legal fees.

The decision to invest in a property can also be a cue to review your current home loan. It could turn out that you can get a better deal by refinancing, and any savings here can free up cash for your investment property.

The “have and hold” strategy

There is another option you may not have considered, and that’s upgrading to a new home while holding onto your first home as an investment property.

There can be a lot to weigh up with this strategy – like whether your home has tenant appeal, what the vacancy rates are like in your suburb, and of course, whether you can afford to upgrade without selling your home. That makes it important to seek expert advice from your local real estate agents, your tax professional and your Aussie Broker.

Talk to your Aussie Broker today about taking your next step on the property ladder.