strong credit score

A strong credit score is an accomplishment in itself. A high score shows that you can effectively manage your responsibilities, make smart choices and are generally dependable in terms of servicing loans, credit cards, utility bills and much more.

However, the real rewards of a top-notch credit score are the advantages and access it provides. You can lean on your superior score to make many credit-related processes easier and to shift the terms and conditions in your favour.

This is especially important in the context of making a major purchase, and even more so when it comes to investment properties.

Let's take a look at the concept of investment properties, and how your high credit score may benefit you, should you choose to purchase one.

Understanding basic investment property options

An investment property involves financial planning. You have to ensure the investment is sound and suits your personal risk tolerance. As an owner, you also have to make efforts to maintain and improve the property. 

Moneysmart offers a detailed guide to the pros and cons of property as an investment option.

The basic concept of investment properties is simple: You purchase real estate with the ultimate goal of profiting from it. There are three major avenues for doing so - capital gains, rental income or a combination of both.

Capital Gains

When you purchase a property with the intent of selling it in the future, for more money than you paid for it initially, you are focusing on profiting via capital gains.

You might live in the home for some period of time, especially if you want to take a stab at DIY home improvement, or rent it out before the final sale. The key piece of context is that you're looking to earn a lump sum from the sale as your primary goal. This lump sum is referred to as capital gains. Keep in mind however, that capital gains tax (CGT) applies on investment properties that are not considered your primary residence. However, you are eligible to receive a 50% discount on your tax bill if you have held the property for over 12 months.

Note that CGT calculations are not always straightforward and you should consult a qualified tax advisor before making any investment decisions that factor in tax considerations such as CGT,

Source: https://www.ato.gov.au/Individuals/Capital-gains-tax/

Real estate markets are by no means certain, and there is no guarantee that you can earn money on an investment property. But there's also no doubt that some individuals and businesses are successful in this type of venture.

Rental Income

If you own a building and rent part or all of it out to tenants, you are focusing on making rental income. It could be an apartment building, a single home, townhouse or anywhere else where tenants could safely live.

A single monthly rent payment pales in comparison to the full value of the property — you won't get rich quick off of renting out a building. However, as long as you have people occupying the available units and paying rent, you have a regular source of income. And if the costs of maintaining the building and other related expenses don't exceed the income that comes from that rent, you'll turn a profit.

Combination

The above two strategies discussed are very different approaches to monetise investment properties, however you can actually combine them both.

Let's say you purchase a property, and then rent it out for ten years. After ten years of collecting rent, you then sell the property at a higher net price than what you bought it for. This means you not only earned rental income, but also made capital gains on that property.

How a high credit score can support your investment property plans

Ideally, you could purchase an investment property outright, minimising the involvement of lenders and avoiding the need to pay the interest that comes along with an investment loan. However, this requires large capital investment upfront, which isn't feasible for a lot of investors.

A high credit score can support your efforts to both purchase a rental property and secure a loan for it by:

  • Demonstrating your basic trustworthiness and credibility as a borrower: In general, lenders like working with customers who have high credit scores. A top-notch score indicates that you're willing to follow the bank's rules and have a history of prompt payments on your bills, something that's likely to extend to the investment loan.
  • Allowing you to access a higher Loan to Value Ratio (LVR): The LVR is a figure commonly calculated by lenders to determine the relative risk associated with a loan. This ratio represents the percentage of money borrowed compared to the total value of the property. Lenders prefer a lower LVR because it means less risk. When you have a high credit score, you may be able to borrow more of the total cost of the property. That makes purchasing easier.
  • Potential for better interest rates, terms and conditions: Investment loans are relatively complex agreements, and some lenders may leave room for negotiations around the specifics, such as interest rate, terms and conditions. If you have a great credit score, you have more leverage  on your side in these conversations.

Keeping your credit score as high as it can be

A high credit score can only help you when purchasing an investment property. So, how can you keep your score as high as possible?

Signing up for a free and secure account from GetCreditScore allows you to regularly and easily monitor your score. You can check your score at your leisure as well as set up automated alerts around changes to it. Being consistently informed puts you in the best possible position to notice changes and, if needed, act to address them.

 


Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.