A Step-By-Step Property Investment Strategy for Melbourne Investors

If you invest wisely, you’ll buy a property that provides solid and growing rental income and benefits from capital growth in line with your investment objectives.

Rental income in Melbourne outstrips wage growth and inflation

In the September quarter of 2015, the median rent in Melbourne stood at $380. That’s $110 higher than in the September quarter of 2007 (data from dhs.vic.gov.au). This average annual increase of more than 4% per year is some way above the average wage growth in Australia over the same period. In fact, investors in Melbourne property have also seen their rental income outstrip the average annual inflation rate of 2.6% since 2007.

Capital growth outstanding, too

Over the past few years, savvy Melbourne investors have benefitted not only from inflation-busting growth in rental income but also from incredible growth in property values. Even with the property market ‘crash’ in 2008, the median house price in Melbourne has increased from around $450,000 at the end of 2007 to more than $710,000 at the end of 2015. The median price of apartments has increased from around $380,000 to almost $540,000 during this time (REIV property data).

With a simple step-by-step property investment strategy, you could not only make these types of gains but beat them: remember, all the above numbers are based only on average returns. Here’s a 10-step strategy that will ensure you make the best property investment in Melbourne.

1. Calculate how much you can invest and benefit from tax advantages

Many property investors capitalise on the equity they have in their own home to boost the amount they can expend on an investment property. This equity can be released to provide the deposit required for your investment property. The amount you can borrow to fund the remainder will depend upon a number of factors including:

  • Expenses associated with the purchase
  • Stamp duty
  • Council rates
  • Anticipated rental income

If you are buying an off-plan property, you’ll benefit from the Victorian government’s beneficial treatment of stamp duty that can save you $1000s.

Think about buying and selling costs, the possible return (capital growth and rental income), and the cost to borrow.

Visit a mortgage broker, and discuss the different types of loan available. With your loan pre-approval in place, you won’t miss out on an exceptional opportunity when it comes.

2. Consider positive and negative gearing

While location is a key consideration, you’ll also need to consider gearing. What the best gearing strategy is for you will depend upon your investment strategy, the size of your deposit, and how much risk you are willing to accept.

A positively geared property is one which produces more income than it costs to fund the investment. With positive cash flow, there may be tax to pay on the net income.

A negatively geared property is one where the rental income is less than expenses. In this case, the investor can offset the net cost against other earned income to reduce his or her tax liability. The property investment is therefore effectively funded by the tenant, the taxman, and the investor. This may be a good strategy for high rate taxpayers, as the objective will be to reduce income taxes and benefit from the lower tax rate on the capital gain when the property is sold.

3. Find the best property for your investment

Today’s owner-occupiers and renters are more likely to want to live in a modern property that does not need high levels of maintenance. They will be concerned with size of rooms and features such as energy efficiency.

They will also look for certain benefits of location. For example:

  • Is the home close to work, schools, shops, and open spaces?
  • Are transport links to the CBD and elsewhere easily accessible?

Consider local demographics when researching an area in which to invest: what are the population numbers, and how is the local population expected to grow?

Finding the best property requires a lot of legwork, time, and effort. Many of the most successful investors sign up for newsletters and investment websites to ensure they don’t miss out on planned development news.

4. Get legal advice and make an offer

Now that you have found the best investment property to suit your goals, you’ll need to make an offer. Before you do so, employ the services of a conveyancer or solicitor to check the contract for sale. If you are investing in older properties, you should get pest and building inspections before you make an offer.

5. Give the contract to your legal representative

Your legal representative will advise you of any cooling-off period. Once you have signed and exchanged, the contract becomes legally binding.

6. Get final loan approval and organise insurance if needed

In most cases, your mortgage provider will need you to organise building insurance, and lender’s mortgage insurance – if your loan to value ratio is higher than 80% (though some lenders have a higher limit). If you are planning to rent out your investment property, you will also need landlord insurance.