Investment properties have long been recognised as a potentially lucrative method of generating wealth. However, successfully venturing into real estate investment requires careful planning, especially when it comes to securing loans for these properties.
As every individual’s financial situation is unique, it is paramount that borrowers thoroughly assess their loan structures; seeking professional guidance is essential to navigate the complexities involved and make well-informed decisions that align with the investor’s long-term financial goals.
Below, we discuss some of the important considerations to make when deciding on a loan structure for an investment property purchase.
Understanding loan structures for investment properties
Investment property loans differ from traditional home mortgages. Lenders often perceive investment properties as higher risk due to their potential for fluctuating rental income and the borrower’s reliance on tenants to generate cash flow. As a result, loan terms, interest rates, and eligibility requirements can vary greatly from mortgages that some borrowers may be used to.
Some of the most common investment loan structures are:
Principal and interest loans
Principal and interest (P&I) loans are a common investment mortgage structure. Like many home loans, the loan structuring of a P&I loan means that your loan repayments effectively pay off two separate components of the loan, the principal and the interest.
Principal: This refers to the original amount you borrowed for the home loan.
Interest: This represents the interest rate your financial institution charges for lending the money to you.
Some property investors choose P&I loan structures as they may potentially build equity in the investment property quicker than an interest-only loan structure. However, that is only one of many components that need to be factored in when choosing whether a P&I loan is best for you.
The primary distinction between principal and interest repayments and interest-only repayments lies in the approach to paying off the loan. Principal and interest loans commence with an immediate reduction of the actual loan amount, gradually paying off the borrowed money and interest through monthly repayments. In contrast, interest-only loans solely cover the interest expenses without contributing to the repayment of the principal. As a result, the actual borrowed amount remains unchanged over time.
Typically, the appeal of interest-only loans for property investors is that they can potentially claim the total repayment amount (as it is an investment expense, given it’s calculated solely on interest charges) as a tax deduction from the income the rental property generates. However, investors need to repay the loan principal at some point, so this must be considered before deciding if an interest-only loan is in your best interest.
The importance of individualised assessments
Each investor’s financial situation is unique, and adopting a one-size-fits-all approach to investment property loans may be detrimental. Evaluating factors such as debt-to-income ratio, existing assets, repayment capacity, borrowing capacity and long-term financial goals may help borrowers tailor their loan structures to suit their needs. Some investors may prioritise maximising cash flow, while others may aim for faster equity growth or tax advantages, so it’s important to always assess your options based on your individual circumstances.
Tax and legal implications
Professional guidance becomes even more critical when considering investment property loans’ tax and legal implications. Tax laws can be complex and ever-changing, and deductions related to mortgage interest, property taxes, and depreciation can significantly impact an investor’s bottom line. A knowledgeable advisor may help borrowers navigate these intricacies, ensuring they take full advantage of available tax benefits while remaining compliant with current regulations.
Which is the best investment property loan?
When you opt for an investment property loan, it is prudent to seek the advice of financial planners, accountants or other finance professionals to understand which loan structure will work best for your personal financial objectives and individual financial circumstances. Particularly when it comes to investments, many investors choose to receive tax advice to ensure that their investment is structured in the most tax-effective manner.
Are investment loans different for property investments in Specialist Disability Accommodation (SDA)
SDA property investment can potentially reap financial return while positively impacting NDIS participants and the general community. Under the National Disability Insurance Scheme, there are strict SDA rules to adhere to, which adds a layer of complexity to NDIS properties versus traditional residential properties. However, unlike conventional residential investment properties, NDIS properties come with SDA funding from the government, have multiple tenancy agreements and reduce the strain off families and aged care facilities.
Before adding an SDA property to your property portfolio, talk with the team at Apollo Investments about the right way to structure your NDIS loan. We assist investors through the entire investment process, taking out the guesswork around SDA provider registration, building SDA-compliant homes, accessing SDA property management and financing your SDA property investment.