Owning an investment property continues to be Australia’s most popular form of investment. It’s a great way to increase wealth and secure your financial future, if it’s done right.
Understanding your financial goals and how an investment property can assist in achieving them is essential. A fact to be mindful of is that with all investments there are be positive and negative returns, and research is essential prior to purchasing.
We're making it easier today by sharing our top tips for buying an investment property to help you out:
1. Know how old the property you’re buying is and what order it’s in:
Knowing the condition of a property you want to purchase is essential. Unless you are budgeting to renovate the property yourself, there may be extra costs you may not have accounted for. Needing to replace the roof tiles or hot water services, even with negative gearing can significantly damage your cash flow. It's advisable to speak to a professional building inspector if possible before conducting an inspection of the property yourself. Paying for a building or pest inspection is worth the small sum of money, to be assured the property is up to standard and won’t cost you an arm and a leg later on.
2. Maximise rental potential of the property:
Make the property attractive to renters. Ensure the kitchen and bathroom are in good condition and go for neutral tones throughout the home. This way you will attract better quality tenants. As mentioned above, renovating the property can also be an option. Purchasing a property not in peak condition, gives you the opportunity to significantly add value to your investment. Overall, this can increase the capital growth and rental income for the property. Now that’s something you can’t do with shares!
Keep in mind however, this is a home for your tenants and not your own, avoid becoming overly attached. You will want to sell the property one day, and if the home is appealing to the existing owner occupiers, they are often willing to pay a little more for the comfort of where they've been residing already. Buy and renovate with a logical, not an emotional approach to the property.
3. Look at things from a long-term perspective:
The main aspect of investing in property is that it is a long-term investment and you should not rely on instant property price growth. The longer you can commit to a property the better, as this will build up equity, possibly allowing you to purchase another investment property. However, ensure you have financial stability and able to enjoy life! Recognise that property investment isn’t like shares where you are able sell of easily if you need funds. It is a huge long-term commitment.
4. Engage in a good property manager:
Property managers are professionals in their field, keeping things in order for you and your tenants. They can provide you with ongoing advice and provide the best possible value from your property. A good agent (we know some fantastic ones! ask!), will let you know when you should review rental prices, will provide advice on property law and take care of any maintenance issues. They will also help you find the right tenants by performing references checks, and ensure rent is paid on time. The best part is, the costs of paying your managing agent is often a percentage of the rent paid (automatically deducted) and is tax deductible!
5. Understand the current market and dynamics of where you’re buying:
Finding out what other properties are available in the immediate area and speaking to locals can be useful. Real estate agents often may reveal the local dynamics, such as which side of a street is considered more superior. It’s important to do your research on the area you’re buying in, such as information on average rents, property values, demographics and suburb reports. You can easily access a lot of this information on the internet. It’s also ideal to find out what changes may be happening in the suburb and council, such as major construction or road changes near your potential property, resulting in added or lost value on the property.
6. Pick the right type of mortgage (that’s our job!):
Pick the right property at the right price
This is where we come in! There are many options when financing your investment property making it difficult to know if you’re getting the right deal. Hence, as your financial broker we can make things easier and do the searching for you. Structuring your loan correctly is vital which should be done with our help. You may be missing out on financial benefits that other brokers are unaware of. We’ve even heard it from clients, saying their previous lenders didn’t know about the benefits lawyers can receive. In our recent testimonial video with our client Chris Merjane, a tax lawyer from Gilbert & Tobin, he says he often found he "had to baby sit" his brokers on multiple occassions, and that they "missed out on settlements" because of time-poor mistakes from choosing the wrong broker. This is why it is crucial to find the right broker, and then the right loan for your investment property.
7. Make sure to do your sums— check your cash flow!:
As mentioned earlier, investing in property is a long-term commitment which is proven to result in long term wealth, which is why you would want to make sure you can also afford maintaining mortgage repayments in the long term. You'll want to sell the property at an ideal time and not be pressured to sell when you encounter financial stress. Once you purchase the property, it can actually be fairly inexpensive to keep and service the loan. This is exponential with time as the rent you earn increases as well as your personal income, and you receive tax deductions on expenses associated with the property. Do expect things to get easier over time, however ensure your financial plans and budgeting are in line with the costs of owning an investment property.
8. Try and use equity in another investment if you have it:
An effective way to buy an investment property can be by leveraging equity in your home, or equity from another investment property. The equity is the amount of money in the home which you actually own. Also, when the value of your home rises such as through renovating the property, the equity does too. Lenders calculate your loan to value ratio (LVR) to ensure some equity is held as security, which will then let you determine how much equity you have after refinancing. Using equity will allow you to borrow more money against your investment property, increasing your tax deductions.
9. Negative gearing is a definite plus:
Negative gearing provides property investors the opportunity to receive certain tax benefits if the cost of the investment exceeds the income it produces. As you may know, Australian law allows you to deduct borrowing and maintenance costs for a property from your total income, which you can only benefit from if you earn other taxable income. Another advantage is that the loss from the property can used be to reduce the amount of tax on other earnings. Keep in mind not to buy an investment property to simply reduce taxes, it's never quite that simple!
If you would like some individual advice and assistance on your future or existing property investment, contact our brokers on (02) 9030 4020, +61 423 347 562. or email firstname.lastname@example.org.
We look forward to arranging an obligation free meeting or having a chat on the phone to work out the right loan structure to maximise on your investments!