Safe as houses? Ten moves you need to make before buying an investment property
Using equity in your home to purchase another, have the rental income offset the mortgage while the property increases in value seems like a foolproof way to build wealth. But mistakes can be expensive and turn dreams into nightmares.
Consider this: the most recent Australian Tax Office data shows that of the 2.2 million people who filed income from a rental property, 59% declared a net rent loss (negatively geared). That may be great for some people who have sufficient income and want the tax break, but it also means that many people are dipping into their pocket to help fund the mortgage on the investment property.
Simply put, it seems easy, but successfully investing in property requires homework and due diligence if it’s going to work for you. Here are six tips that will help you with your property investment decisions.
Your investment goals
Typically, people see investing in property as an opportunity to make money through rent, called a passive income. Consistent capital growth is also part of the appeal of owning an investment property. But there are a number of strategies you can pursue, that will also impact the type of property you buy. Think carefully about what you are trying to achieve and what that commitment entails. Despite the media hype, property is a long-term investment where the value of the asset gradually increases. Finally, unlike investing in shares or managed funds, you can’t sell your property tomorrow if you need cash quickly. There are no guarantees, so choose your path wisely.
There’s more to setting your budget than calculating your loan repayments, estimating rental income, and taking out management fees. Get professional advice and use the most accurate numbers. Borrowing on equity will increase your debt levels, so you want to be sure you don’t end in a financial hole if interest rates change, and your mortgage payments increase. Your financial advisor can help spell out the additional or hidden costs, such as council rates, landlord insurance, and so on. Don’t just rely on the market for rental income. Look at hard data held by rental bond authorities and factor in the time the property is vacant while searching for tenants. The last thing you want is to find that a sound investment is costing you money that you can’t afford.
It’s your property, but it’s not your home. The features that appeal to you as an owner-occupier might be less relevant when it comes to finding an investment property. Look for homes that are in demand in the rental market, rather than places you would love to live in. Buying the wrong type of property could mean it’s vacant for longer than you bargained for, or you have to accept less in rent. Added to that is the emotional attachment to quickly building wealth. Buying a property and flipping it for a tidy profit is more often than not a fairy tale. Believe us, we’ve seen it so many times.
Research the area
When it comes to looking for a property, there’s a big difference between knowing your neighbourhood and knowing the market. This is even more critical if you’re buying out of your local area. You can go to open houses and search the listings on the internet, but you’re still missing the broader market perspective. Knowing the street-level trends as well as the economic cycle takes years of being immersed in the industry. Seek out expert advice and don’t rush in.
The right type of property
An apartment? Townhouse? House? Buying and renovating? There are many choices when it comes to the type of property to buy. If you’ve already mapped out your investment goals and have a solid budget, you’re halfway there. The big question then is finding a property that renters want to live in. Consider the tenant you want and ask if they’d be happy to pay money to live in your property. Is the layout appealing? It is comfortable and practical? Does it have the features they rely on or desire? As you would with buying a home you’d live in, check the age and condition. A well-presented home with a bathroom and kitchen in good condition will have a greater chance of attracting good tenants.
Get a property manager
Property managers know the ins ands of the rental market and should be well versed in property law. They can be the go-between that takes care of any issues with the property and give you advice when it comes to finding tenants, making sure they pay their rent, and your responsibilities as a landlord. Property management incurs a cost, but a good property manager can help protect your investment – and your sanity.
I was born to be in sales. From a very early age, I was serving and helping clients in my father’s hardware business and giving them advice, which is scary. I love working with people, helping them get what they want, and pushing myself to excel. My friends and family that know me well laugh about all the jobs I have done over the years, but it was all to get me to this point in my life, a real estate agent.