What are the best ways to finance an investment property?

Taking out a mortgage – despite high interest rates – is still considered the best way to finance an investment property by most experts, but the mechanics of that, and its popularity, have changed over time.

Even five years ago, many buyers would approach one of the “big four” banks, but now, mortgage brokers have really come into their own.

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“It’s a more clever way of getting a mortgage,” says property investment strategist Uwe Jacobs, director of Property Friends.

“They have different lenders for different occasions and know the best strategies to reach long-term goals.

“A good mortgage broker is now recognised as a great asset to an investor to help them build a portfolio over time, and it’s always best to do that with a mortgage: using other people’s money.”

Of course, there are many other ways of financing investments, such as using equity in homes already owned, savings, an inheritance, gifts, or buying via a trust or corporate structure.

Setting up trusts or companies for investments will always depend on personal circumstances and will only be beneficial when at least two or more properties are owned, to make the most of different structures and tax advantages, says Leanne Watson, mortgage and financial planner at Your Finance Angels.

But when choosing a method, it’s vitally important to do all the sums on the price and holding costs of the property, as against the tax liabilities and possible deductions.

“If you use cash, then obviously you lose the tax deductibility of a loan,” Watson says. “It’s also harder to buy multiple properties.

“You might have $1 million that would allow you to buy one property, but it would be better to use $250,000 for deposits on four properties instead.

“You do need to review loans every 12 to 24 months, however, making sure it’s working for you.”

Existing good equity in a house can be useful, though. With the price often doubling every 10 years, you can use the equity to buy the next.

“It will also depend on your investment strategy – whether you plan to buy and hold, buy and sell, or buy, hold, develop and sell.”

Interestingly, interest-only loans are now back in fashion, says Rebecca Jarrett-Dalton, the founder of mortgage broker Two Red Shoes.

They were hard to access for a time but now, because of changes in government regulations, they are easier and cheaper to obtain.

Also, we’re seeing a preference for mortgage insurance return, with many now newly classing it as a business expense.

“I think generally the means of financing investment properties haven’t changed, but motivations have,” Jarrett-Dalton says.

“Now, we’re seeing a lot of people choosing to buy investment properties to either sell to each of their children for the price they [paid] for it or rent it to them, or let them rent it out.

“We’re also seeing a lot of people now buying their future retirement home, beachside or tree-side, which is a completely different mindset to previously.

“It’s so they can have a footprint in the area they want to get into.”