An investment property is becoming a more popular choice for those seeking to create a revenue stream and also achieve capital growth through the investment property value increasing over time.

This can also be part of a strategic financial plan and should be considered by investors as part of a diversified portfolio. When considering an investment purchase you should also source the best investment loan structure for you. With any investment your investment loan can make a difference to your return. If you are negatively geared through an investment loan the cost to you of that investment loan can effectively be reduced.

If you purchase wisely, once there has been capital growth in the investment property over time there is the option of using this built up equity to move into another investment property, take out another investment loan and thereby continue to further increase your investment portfolio.

Aside from the traditional belief that tax advantages are the key driver for taking out an investment home loan there are many other factors to consider when purchasing an investment property.

Below are some key points for your reference, by using these points as a guide in conjunction with a detailed discussion with your accountant or financial planner you will be in a better position to ensure your investment purchase and investment loan is a financially sound decision for the long term.

In relation to property enquiry therefore, you should consider:

* What is the infrastructure like in the area? Are there enough schools, hospitals, shopping centres, doctors and dentists, freeways or main roads?

* What has the historical capital growth been in the area over the last two decades?

* Is the local council planning to increase housing density or add a new road to increase traffic flow?

* If you are purchasing in a new subdivision, are there more new land blocks and house and land packages planned nearby. New developments can impact on the value of your home as purchasers often prefer a new home to one that might be 2 or 3 years old in the same area.

* What length of time will the investment be held? And will this tie in with planned infrastructure development which will in turn accelerate capital growth?

There has been recent press to suggest that investment and home property values in Sydney have a potential capital growth of 18% over the next 3 years so buying off the plan as an investor may be an attractive option in the current market. If you find a good property development, suitable for investment, which has a completion date in say 2010 – 2011 then you can exchange contracts with either a 10% cash deposit or a deposit bond (as a guide the cost of a deposit bond of around $86500 for say settlement September 2011 will cost you approximately $9000- $9500 (significantly less than the interest you would pay over the period if you borrow $86,500 at current interest rates of 9% p.a). The general feeling is that direct investment into property as opposed to into managed property funds is a better way to go – you are in control of your investment and avoid the high management fees so often charged by share and property investment funds.

Do some research on the internet to see which areas have the greatest potential for capital gains – remember if you are looking for an investment property you should invest with your head not your heart. An investment property needs to be well located to transport and other facilities so that those renting can easily access these services.

When considering which investment loan would suit you best take the following into account:

1. Does the investment loan allow you to split it into a number of investment loan accounts. This is a good feature to have in an investment loan because you are positioning yourself for the future – if you use the investment property at a later date to gear into another investment purchase then you can split the account so that the investment loan portion relating to the new purchase is clearly identified. This allows you, and your accountant, to easily track the costs associated with the new purchase.

2. If you use your home property (with an existing home loan) as security for the investment loan then it is imperative that you do not mix any home loan debt with your investment loan borrowings. The ATO in Australia requires you to apportion any additional repayments to a loan where the borrowings are “mixed”. You want to apply any additional repayments to your home loan before your investment loan. You are paying your home loan off in after tax dollars – whereas you can deduct the interest you are paying on your investment loan against the income form the investment property.

3. Does the investment loan allow you to capitalise interest? It is always a good idea to include a capitalising feature as a part of your investment loan to protect you against any unexpected costs in relation to the property. It also means that instead of subsidising the investment costs and interest shortfall on your investment loan you can capitalise these and make additional repayments to your non-deductible home loan debt.

4. If you have sufficient equity in your home then you may be better to consider a 100% + costs investment loan for the investment acquisition and use any savings you intended for the investment purchase to pay down your home loan debt.

If you consider all these points your investment loan will be working in your favour at all times.

Obtaining a loan can be a daunting process, to say the least. For whatever reason, whether it is an investment loan or for the home, a person has to meet the criteria if they wish to have their application granted. Obviously, everyone cannot get an investment loan, otherwise the world would be in a state of turmoil, to say the very least. Fortunately, it is not as hard as people may think to get a loan for whatever they may need it for, if they are willing to go about it professionally. If a person wants to be slapped with an approval letter, they will have to do their homework.

This is the first step of having their applications granted for an investment loan, and many people would be surprised at how many people do not take this step seriously. It will substantially increase the chances of the lender taking on this task. A person will definitely need to know their loan-to-value (LTV) percentage if they want to be approved for the loan of their choosing. The LTV is essentially how much the property is worth on the market, as opposed to the size of the loan a person is taking out. It is noteworthy to state that a lender will more than likely not lend to a person or group with an LTV percentage that exceeds 70%.

Another thing to consider is the debt coverage rate (or DCR) of a property. The DCR is basically how much money a person is making from a property when compared to how much the property is actually worth. Favorably, a person or group will want to make sure that it is not less than about 1.2, otherwise they will have a hard time getting their investment loan approved.

There are other factors that determine whether a person will get an amazing investment loan or not. For instance, the lender will want to make sure that they are getting a pretty decent return on investment, and they can produce the money needed for the monthly payments on the loan. There may also be the “Statement of Personal History” which will include a plethora of things. Usually, it speaks about the person’s character, and how willing he/she is to repay debts in the past. This is probably one of the most important things when obtaining any investment loan, because no one wants to be stiffed when it comes to repayment time. If the statement is a weak one, the person will have a hard time receiving any loan, let alone one of the best.

The investment loan has been a pillar of many societies throughout history, and obtaining the best loan is within reach of anyone who decides this is what they want to do. Although there are additional requirements, depending on where a person may want to invest, these are mainstays regardless of where the property is located. In summation, if a person is willing to do their homework and have a pretty clean bill of financial health, they will have no problem obtaining an investment loan

As discussed in Part I there are many astute property and share investors in Australia who often fail to ensure that the investment loan they take offers the best available features and most tax efficient investment loan structure for them.When considering an investment loan you should ensure that you maximise your investment loan and that the interest rate is competitive (but not necessarily the cheapest – do not sacrifice features for interest rate); you should take the investment loan on an interest only basis and apply any surplus cash you have to the repayment of your non-deductible (your negative gearing benefits are maintained); you should not mix your investment loan with your home loan debt because the Australian Tax Office requires that any additional repayments of principal to such a “mixed” account must be apportioned between the home loan and the investment loan (your negative gearing benefits on your investment loan will reduce as a result).Another feature that all investors should include in their investment loan is a separate capitalising investment line of credit. The line of credit should be for a 10 year term minimum and be interest only. The importance of a capitalising line of credit within your investment loan structure cannot be underestimated. By having such a facility including in the investment loan you protect yourself form unforeseen vacancies and expenses in relation to the upkeep of your investment property. In a recent private ruling issued by the ATO a taxpayer was provided with a favourable outcome when he sought confirmation from the ATO that where he held an investment loan and the rental income did not cover his investment expenses (interest, costs, rates etc) then he could capitalise interest on an investment line of credit where the line of credit was used to meet the shortfall between his investment income and his investment costs (interest on the investment loan being a large portion of this. The taxpayer also had a home loan and advised the ATO in his private ruling application that he did not want to use his personal income to subsidise the shortfall (including the interest on his investment loan) that he was having to meet each month. Rather he sought to draw down on the line of credit within his investment loan facility to meet the shortfall and apply as much of his personal income to the repayment of his personal home loan debt.Under the line of credit he was not required to make any payments to the investment line of credit so the debt increased. The interest also increased with the result that the taxpayer could deduct the simple interest on the investment loan as well as the simple and capitalised interest on the investment line of credit. This delivered additional negative gearing benefits to the taxpayer while also saving him significant dollars on his home loan debt. By applying more of his personal income to repay personal debt he reduced his home loan term by 8 years and saved himself many thousands of dollars in the process.Make sure you include a capitalising line of credit within your investment loan structure – you have both protection (from vacancies, higher interest rates,unexpected costs) as well as the opportunity to increase your negative gearing benefits and reduce your home loan interest! Make your investment loan work for you and improve your investment return.

There are many astute property and share investors in Australia and invariably acquisitions are financed by some equity and also debt. What many investors do not realise when seeking an investment loan is the difference flexibility and structure in an investment loan can make to their returns. The important features to look for in an investment loan are: How much should you borrow? Taken that you have a secure job and reasonable cash flow then it is worth considering maximising your investment loan in that all interest payable on it is tax deductible. Many investors when taking an investment loan gear the investment property to 80% and make up the balance with cash rather than taking a further investment loan secured over their home property for the balance of the purchase price. This is an emotional decision – but not necessarily a tax efficient one. If you have the cash for the balance of purchase price (say $60,000) and also have a home loan then you would be far wiser to apply the $60,000 to reducing the principal amount of your home loan and then borrowing $60,000 as an investment loan being the balance of the purchase price. Sure, the investment loan is secured over your home property but at the end of the day it is the same $60,000 commitment. Instead of paying interest on your home loan in after tax dollars you reduce this “bad” personal non-deductible debt and instead increase your “good’ deductible investment loan borrowings. This makes your borrowings much more tax efficient.Principal and Interest vs Interest only? Again, while ever you have a home loan it is much wiser to have this personal debt on a principal and interest basis so that you pay it out as quickly as possible. Even if you are in a position to repay the investment loan on a principal and interest basis you would be much better off financially if you applied that portion of principal normally going to the investment loan, to an extra repayment on your home loan. Even an extra $100 per month to your home loan can save you many thousands of dollars (e.g $250,000 @ 9% p.a. over 25 year term – extra $100 saves you over $65,000 in interest payments.)Interest rate applicable to the investment loan. Obviously any investor wants to achieve a good interest rate. My advice is not to seek out the cheapest interest rate as in doing so you will invariably have to compromise on features.The loan structure. Make sure you do not “mix” your investment loan by including it as part of your home loan. The investment loan must be a separate investment loan account. If you do not structure your investment loan this way then any extra principal repayments must be apportioned between your home loan and your investment loan. Again you end up having to reduce your good debt rather than the non-deductible home loan debt. SEE ALSO PART 2 Best Investment Loan.