Investment Property Smart Guide

4. Selecting a property

What you'll learn in this step: Good buys arent necessarily close to home.

Having worked through the financial considerations, and bearing in mind that youre not actually going to live in the property, you should be able to make a fairly rational decision about where and what to buy.

Youll want to benefit from as much capital growth as possible, so the first rule is to buy in a growth area.

That might be a suburb located within 10 kilometres of the city centre, or a suburb with special attractions such as a beach or trendy caf strip. Proximity to a hot suburb could mean your suburb will be next to rise in value.

It could even be a regional town supporting a booming industry.

Narrow your search down even further by looking at a propertys access to transport, shops and leisure facilities and its appeal to your market whether theyre young professionals or blue-collar workers.

Another decision is what to buy house or unit? old or new? Units usually are a much better proposition for landlords. Theyre easier to rent out and easier to maintain: there's no lawn to mow, and when things go wrong in the building the expense is shared with the other owners.

Properties with a view are always more desirable than those without, and tenants like facilities such as balconies, internal laundries, undercover parking and security.

These sorts of facilities may not be available in an older property, which may have to compete with a new apartment building down the road with all the mod-cons.

If the property youre interested in is already rented, ask about its history of tenancy. Have there been periods when it hasn't been occupied? If so, find out why. You dont want to inherit those problems.

The bottom line: balance what you can afford to buy with the rent youll be able to charge. Theres no point buying a waterfront property if you cant find tenants happy to pay the sort of rent youll need to make the exercise worthwhile.

Buying

Once youve found the right property, the actual mechanics of buying it will be the same as if you were buying a home to live in. See our guide to buying a home for what happens next, and for pointers on how much to borrower, where to borrow, and what types of loans are available.

There are few differences between borrowing for a home and borrowing for an investment property.

Some lenders charge a higher interest rate for investment properties because they say their risk is higher, but shop around and you should be able to get a rate thats the same as for an owner-occupied property.

One option of particular interest to investors is the interest-only loan, where you don't pay off any of the principal, just the interest.

Such a loan can make it easier to estimate the true returns from a property. A tax advantage is that interest payments for investment properties are tax deductible, while payments off the principal are not.

One strategy that is being touted is to take out an interest-only loan and divert the money you would have paid off the principal to your tax-efficient superannuation fund. Upon retirement, you use your super pays off the loan. Remember, though, that this money is locked up until at least age 55 and you wont have access to it if you strike a cash-flow problem.