How to Buy Your First Investment Property in Australia
If you’re wondering about how to buy your first investment property, the chances are that you realise property can be a great wealth creation tool. Maybe you’ve been hearing about friends or colleagues building wealth through real estate. Maybe you’ve noticed your home has grown in value since you bought it and wondered if you could use that to get ahead.
The good news? Getting into property investment might be a lot easier than you think, even if you don’t have a massive savings account. The key lies in something many homeowners already have.
Equity.
In this guide, we’ll break down exactly how you can use the equity in your current home to buy your first investment property. We’ll cover the practical steps, common pitfalls, and simple strategies to help you take that first confident step into the world of investing.
Why Buying Your First Investment Property Might Be Easier Than You Think
Remember when you purchased your first home? You probably sacrificed a great deal to save a deposit. Which is probably why most people avoid thinking about investment property. However, if you’ve owned your family home for a while, did you know that you may not even need a single dollar of your own money in order to buy your first investment?
Your existing property could hold untapped potential through equity.
Think of equity as the portion of your home that you truly own. It’s the difference between what your property is worth today and what you still owe on the mortgage.
Here’s an example:
10 years ago, you purchased a property for $500,000 with a mortgage of $400,000. This would mean your equity in the property (the part you own) is worth $100,000.
Let’s say you only covered the interest on your loan for the last 10 years, so today, your mortgage is still $400,000.
A lot of people would think that they haven’t got anywhere with their mortgage payments, but the truth is quite different.
Today, it’s possible your home is worth $1,000,000.
That would mean that your equity is now:
$1,000,000 – value of property
minus
$400,000 – loan remaining
So today, your equity is actually worth $600,000.
With the right lending structure, you may be able to access a portion of that $600,000 to cover the deposit and costs for an investment property.
Suddenly, the path to buying your first investment property becomes less about saving for years and more about unlocking what you already have.
Understanding Usable Equity and How It Works
So what if you have $600,000 of equity? It doesn’t mean anything unless you sell the house, right?
Well, no.
You see, the way banks see equity is a little different. Lenders are willing to borrow against a portion of this equity, because they know that this represents the true value of what something is worth. It’s not a great risk for them, because at the end of the day, if things go wrong, the lender knows they can recover their loan through the sale of the asset.
So usable equity is the portion of your home’s value that you can borrow against.
| Item | Amount |
|---|---|
| Current property value | $1,000,000 |
| Loan balance | $400,000 |
| Total equity | $600,000 |
| Usable equity (80% of total equity) | $480,000 |
(Usable equity is typically 80% of your home’s value, minus what you owe. Some lenders allow more with Lenders Mortgage Insurance, but that adds extra cost. A lending adviser can easily walk you through the details.)
This usable equity can then be tapped as the deposit for your first investment property! No need to skip the smashed avocado, or daily coffee from your favourite barista. Your home goes to work for you every day whether you do or not.
Think of it as your home helping you buy your next property, while you keep living in it.
How to Use Your Home Equity to Buy Your First Investment Property
So, you’ve figured out that your home has increased in value since you purchased it. What now? Who do you speak to? How do you even find out how much you can borrow?
The most important thing to remember is that you don’t need to sell your home. You are simply going to tap into that asset to leverage the start of your investment portfolio. Stay within your means. Get professional advice. These steps are designed to be done with the help of experts in a controlled manner.
Step 1: Determine Your Borrowing Power
This is where you need to meet with a lending adviser and there are few parts to this:
- Property valuation
- Your income
- Personal expenses
- Existing loans
It’s not as simple as just borrowing against your equity. Just as you did when you likely got your first loan, lenders want to see that you have the ability to pay the loan back.
You’ll also need the banks to do a valuation on your property as well. Generally speaking, it will be a conservative value, so don’t expect their figure to come in at a suburb record price.
As these pieces of the puzzle come together, your lending adviser will give you an idea of what might be available.
Example:
If your usable equity is $200,000, that might cover the 20% deposit and costs on a $900,000 investment property.
Note: A good lending adviser should also be able to walk you through lower deposits using LMI, if that suits your profile.
Step 2: Access the Equity
Most people think that to access the equity, you need to use cross-collateralisation. That means the bank links all your properties under one large loan.
However, you don’t have to do this. In fact, a smarter approach is to release equity through a separate loan facility, which is secured only by your home. This keeps the new investment property loan separate.
Why does this matter?
If your loans are cross-collateralised (both properties tied to one big loan), you lose flexibility. For example, if you want to sell one property, the bank might force you to revalue or even pay down more than you planned. It’s like having all your eggs in one basket.
Better approach:
Your home loan remains as is.
You access a small equity loan (for example $200,000) against your home as a standalone facility.
The investment property gets its own loan (using the example above of $700,000), not linked to your home.
This structure protects your home and gives you more control over each property.
Step 3: Use the Equity Loan as Your Deposit
The equity loan becomes your deposit and costs (stamp duty, legal fees, etc.). Then, you borrow the rest of the purchase price through a standard investment loan.
Example Structure:
| Item | Amount |
|---|---|
| Investment property price | $900,000 |
| Deposit and costs (from equity) | $200,000 |
| New investment loan | $700,000 |
This way, you haven’t had to put even one additional cent of your own savings into your first investment property.
Step 4: Choose the Right Loan Structure
This is where strategy comes in. The first part is to consider cross-collaterlisation as discussed.
Then you have other factors to consider:
- Should your investment loan be interest-only to maximise cash flow?
- Should you split loans for tax effectiveness?
- Do you go for a low interest rate, or more favourable terms that could lead to building your portfolio faster?
These are the types of questions an experienced lending adviser will answer.
You also should keep in mind that the loan pre-approval you will get for your investment property may include part of the income from rent, which increases your serviceability.
Step 5: Think Like an Investor
It’s not about emotion. You’re not looking for a place to live. If you’re learning how to buy your first investment property, talk with people who have done it before.
The right investment property should focus on:
- Long-term capital growth potential
- Rental yield to help cover repayments
- Low-maintenance and strong demand from tenants
Common Pitfalls When Using Equity to Invest
Using your home’s equity can be a smart way to get into property investing, but it’s not without risks. Many first-time investors make mistakes that could have been avoided with the right advice. Let’s break down some of the biggest traps you’ll want to avoid.
Over-leveraging and taking on too much debt
It’s tempting to borrow the maximum amount possible, especially when property prices are rising. But loading up on debt can quickly backfire if interest rates increase or if you face unexpected expenses. Life happens. One day, it feels like you have excess cash and the very next, you’re made redundant, your partner falls pregnant, or the mother-in-law moves in.
The key is to leave some breathing room in your finances so that you can handle bumps in the road.
If you’re going to invest in property, the real gains have historically been made if you can hold on for the long term to ride out any storms. Keep a cash buffer. Don’t lose sleep just to over extend yourself.
Focusing only on interest rates rather than structure
Chasing the lowest rate sounds like the smart thing to do (and we strongly recommend you regularly assess your interest rates). But sometimes, the cheapest loan on paper isn’t the best fit for your strategy. Especially for investors.
For example, a good loan structure could mean splitting your loans, using interest-only for cash flow, or having a redraw facility. Even if it costs you slightly more interest. The overall result could be far more beneficial.
The only way you could know this is by planning with an expert. A mortgage broker might find you the lowest interest rate, but a lending adviser can walk you through long term strategies and how your current loans might dictate those.
Not planning for cash flow during vacancy or rising rates
An investment property won’t always have tenants. A couple of weeks’ vacancy can hurt if you haven’t prepared. The same goes for interest rate changes. Having a buffer in your account (or an offset) is critical to avoid stress.
Forgetting about property costs like maintenance, council rates, management and insurance
Too many new investors focus only on the purchase price and repayments, forgetting the ongoing costs that can creep up. Things like repairs, strata fees, property management, and landlord insurance need to be factored into your numbers from day one.
All good investors we work with keep accurate spreadsheets to show exactly what is going out and coming in.
Ignoring the specifics is where many amateur investors find problems down the track.
Either you prepare for anything, or risk everything.
Relying on “hot tips” rather than proper research
Your neighbour, your uncle, or a friend at a barbecue might have opinions on where to buy. Our social media feeds are full of “experts” these days. But property investment isn’t about luck or hearsay. Smart investors rely on data, growth trends, and advice from professionals who understand the market.
Get the right advice from those who have invested for decades. Not someone speculating on “hot spots” or “off the plan” purchases that line the pockets of promoters with hefty commissions.
Consider this fictional example of Tom and Sarah before jumping in.
They used the equity in their home to buy their first investment property in a suburb that “everyone” was talking about.
They maxed out their borrowing power to get the deal done, but when interest rates rose, their repayments jumped by nearly $600 a month.
Worse still, the property sat vacant for six weeks between tenants, and they didn’t have a cash buffer.
What could have been a great investment turned into a serious financial headache. It’s a story we hear all to often. It happens all because so many simply don’t factor in risks upfront.
Tax Considerations and Investment Strategy
When learning how to buy your first investment property, understanding the tax side of things is just as important as choosing the right suburb. Too many first-time investors dive in without considering how their loan structure and expenses impact their tax position. That’s where a well-thought-out investment strategy can make all the difference.
Take the time to sit down with an expert who can guide you through your specific circumstances and goals. This is not a one-size-fits-all step.
Benefits of Negative Gearing and Tax Deductions
This is a very general description, however if your rental income is less than your property expenses (including loan interest), you may be able to offset the shortfall against your taxable income. This is known as negative gearing. And yes, it’s essential you speak with your accountant about this.
It’s also never recommended never to purchase investment property just for tax benefits. Think of them like the icing on the cake, but definitely not the cake itself.
For example, if your investment property runs at a $10,000 annual loss and you’re on a 37% tax bracket, you could potentially get $3,700 back at tax time.
On top of that, many expenses are tax-deductible, including:
- Loan interest
- Property management fees
- Repairs and maintenance
- Depreciation on fixtures and fittings
Again, while not the major consideration for an investment, these deductions can help soften the blow of running costs while building long-term wealth.
How Interest-Only Loans Can Impact Tax Outcomes
Interest-only loans can be a smart way to maximise cash flow, especially in the early years of investing. Because you’re only paying interest, your out-of-pocket expenses are higher relative to income, which may increase your deductions.
However, this strategy works best when paired with a long-term capital growth plan. Remember, you’ll eventually need to start paying down the principal. You can’t have interest-only loans forever.
Why Speaking with Both a Lending Adviser and Tax Specialist is Crucial
This is where many new investors get it wrong. Your property strategy is as much about numbers as it is about the property itself.
A lending adviser can help you structure loans for maximum flexibility and future growth, while a tax specialist ensures you’re claiming what you should and avoiding costly mistakes.
Think of it as your investment team. Skipping this step can mean leaving thousands of dollars on the table. Or worse. If you don’t plan things correctly, you could end up with a structure that’s hard to unwind.
Example of How One Couple Could Build Their Portfolio Using Equity
Let’s look at a fictional couple, James and Emily, who live in Sydney and wanted to take their first step into property investing. They already owned their home, which had grown significantly in value over the last decade.
Their starting point:
- Current home value: $1,000,000
- Remaining mortgage: $400,000
- Total equity: $600,000
- Usable equity (80% LVR): $480,000
Instead of saving for years, James and Emily tapped into $200,000 of their usable equity to buy a $900,000 investment property.
Example of Their Loan Structure
| Item | Amount |
|---|---|
| Investment property price | $900,000 |
| Deposit + costs (from equity) | $200,000 |
| New investment loan | $700,000 |
| Home loan balance | $400,000 |
| Total debt (combined) | $1,100,000 |
Cash Flow Snapshot
They rented out their investment property for $850 per week ($44,200 p.a.).
Annual outgoings (approx):
- Loan interest (6% on $700,000): $42,000
- Rates, insurance, and maintenance: $5,000
- Property management: $3,000
- Total: $50,000
This meant they were negatively geared by $5,800 p.a. or about $110 per week after rent. But with tax deductions and negative gearing, their real cash outlay dropped closer to $65 per week.
So in this example, James and Emily would be responsible for covering the other $65 per week.
Again, this is a simply an example of figures and should just be used as a guide.
Capital Growth Potential
Five years later, their investment property could rise in value from $900,000 to $1,150,000 (assuming 5% annual growth).
That’s a capital gain of $250,000.
Achieved without using any of their own cash savings and cash flowed by $65 per week after expenses and tax savings.
| Value After 5 Years | Amount |
|---|---|
| New property value | $1,150,000 |
| Loan balance (approx) | $700,000 |
| Equity in investment | $450,000 |
| Plus home equity | $600,000 |
| Total portfolio equity | $1,050,000 |
Key takeaway: By leveraging the equity in their home, James and Emily not only built a second property but also grew their total equity from $600,000 to over $1 million in just five years.
Note that this example doesn’t include the out of pocket expenses the couple would have to pay for (along with countless other variables) and is just meant to be a very basic example.
Your Next Steps: How to Start Your Investment Journey
How do you turn all this knowledge into action? Like any project that might seem overwhelming at first, it starts with a plan and a willingness just to take the next step. Don’t overwhelm yourself with details yet and certainly don’t float the idea with anyone who has not already achieved success in property investing.
Instead, follow these simple, specific steps to get started:
1. Meet with a Lending Adviser
Before planning your fortune or looking at any property listings, sit down with a lending adviser who understands investment lending. Tell them what you understand, but be willing for them to teach you how everything works for you. They’ll assess your financial situation, identify how much usable equity you have, and structure the right loans for your goals.
Don’t dive into things yourself. A lending adviser is there to help and it will cost you nothing to map things out.
2. Get Your Home Valued
Knowing your property’s true value is critical. A formal valuation (or even a bank’s desktop valuation) will help determine how much equity you can access. Don’t rely on vague online estimates. Often these are misleading and have an error margin of potentially hundreds of thousands of dollars. Speak with your lending adviser on how to approach this step.
3. Plan Your Borrowing Strategy
A good lending adviser will create a clear roadmap:
- How much you can borrow comfortably
- Whether to use interest-only vs principal-and-interest loans
- How to keep your home loan and investment loan separate (for flexibility and tax benefits)
They will look at your goals, then craft a strategy specific to you.
Remember, you don’t just want someone to find you the lowest interest rate. If you have long term goals, your strategy today can literally be the difference in millions tomorrow.
4. Research Areas and Properties
Once the finance side is sorted, it’s time to focus on what to buy and where.
We strongly recommend engaging a professional to help in this step. Buyer’s agents with decades of experience know the best locations to buy given your strategy, plus they know all the agents in that area and get access to properties before they ever come on the market.
Speak to your lending adviser if you are curious to see how a buyer’s agent could help you.
If you plan on searching for yourself, there’s a few strong tips to consider:
- Search for areas with strong rental demand and future growth potential
- Find properties that are low-maintenance (you don’t want high strata fees, or lifts/gyms/pools to consider)
- Look for suburbs with upcoming infrastructure, schools, or amenities
And here’s what to avoid:
- Stay clear of high density CBD locations as they stifle capital growth
- Avoid any locations reliant on a single or few industries
- Stay away from properties that are “fads” or the latest craze
You want to be buying property that is median priced in high demand locations. That way, you’ll always have a large pool of people who want to live there and ensure you have the most solid investment for the long term.
Remember, your investment property is not about emotion. You’ll never live there. Look for property that has proven long-term growth and financial return potential.
Is Now the Right Time to Buy Your First Investment Property?
If you ask most property investors when they wish they’d bought their first property, the answer is almost always “years ago”. Imagine if you could go back in time 20, 30, or even 50 years and buy property back then.
So why do people try to “time the market” today?
The truth is, no one can perfectly time the market. Even the wealthiest investors don’t rely on guesswork. They invest with a long-term strategy, knowing that property values tend to rise over time.
Effectively, property investing comes down to one question. Do you believe property will be cheaper or more expensive 10, 20 or even 50 years from now? History suggests the answer is obvious.
Market conditions will always fluctuate, but focusing on timing alone is a trap. You will never get the perfect conditions to invest.
- Low interest rates
- Low demand
- Underpriced stock
It doesn’t exist. And even if it did for a fleeting moment, don’t you think all the good properties would be snapped up quickly? And wouldn’t that in turn increase the price of property overnight?
What truly matters is:
- Having a solid borrowing strategy
- Choosing the right property for capital growth
- Working with professionals who understand both lending structures and the property cycle
The best time to buy was yesterday. The second-best time is today. Waiting for the “perfect” moment often results in missed opportunities, while those who take action and hold their investments are the ones who build wealth.
Ready to find out how your home equity could help you start building your portfolio?
Book a strategy session with Indigo Finance today and discover how we can create a lending plan that aligns with your goals.
