Buying an investment property continues to be one of Australia’s favourite ways to invest. An investment property should be about increasing your wealth and securing your financial future. Here are 10 tips to assist in purchasing an investment property:
- Choosing the right property at the right price
Investing in real estate is usually all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you will make, therefore buying at the right price is absolutely critical.
The key is to do your research, work out what properties are selling for in and around the area and you’ll soon discover you’ll become very good at working out a property’s worth. Never consider purchasing real estate in an area you are unfamiliar with.
You probably aren’t aware but lenders and mortgage insurers have valuable data on different locations and property developments, you should try and access this information to assist in avoiding the wrong investment property. Whatever you do, never make a decision to buy an investment property based on a tax deduction – always focus on making the right investment choice.
Ensuring you have a steady rental income stream is also vital. This cash flow will make the holding of the property more affordable and provide a reliable income.
Different classes of residential property – home units, houses and land – can outperform each other over time. For example, vacant land will provide no rental income but may appreciate more quickly if purchased in an area with limited supply. Investing in a home unit might mean less maintenance costs than investing in a freestanding weatherboard house. You may also find, some areas offer higher rental yields, but it is important to do your homework as often these properties provide lower capital growth opportunities.
2. Crunch the numbers – Cash Flow is King!
Investing in property is a proven path to long-term wealth, however you should consider it a medium to longer term type of investment. You’ll want to make sure you can afford to maintain your mortgage repayments over the long term. You will not want to have to sell your investment property until you are good and ready and if you were to encounter some financial stress, this could force you to offload the property at the wrong time.
Once you own an investment property it can be quite inexpensive to keep and service the loan. This is because you should be earning rent and claiming tax deductions on the expenses associated with owning the property. Remember, rent payments tend to increase as does your own income – so expect things to get easier over time.
You probably aren’t aware but lenders and mortgage insurers have valuable data on different locations and property developments and you should try and access this information to assist you to avoid picking the wrong investment property.
Whatever you do make yourself aware of taxes involved in property investing and add these into your calculations. Advice from your accountant is vital in this regard as these can change. Stamp Duty, Capital Gains Tax and Land Tax all need to be taken into account. Remember that interest rates can vary over time but the good news for property investors is that in times of rising interest rates you can normally expect to be able to increase the rent.
You should also know that banks only take 80% of the rental income into account when working out whether you can afford an investment loan. This is due to costs like letting fees and vacancy rates, consider using this as a rule of thumb for you too. If you need help working out the cost of holding an investment property you can contact us.
3. Find a good Real Estate Property Manager and let them do their job
A property manager is usually a licenced real estate agent that is a professional in their field, and their job is to keep things in order for you and your tenant. They can help you with ongoing advice, help you manage your tenants and get you the best possible value from your property. A good agent will let you know when you should review rents and when you shouldn’t.
The property manager should be able to give you advice on property law, your rights and responsibilities as a landlord – as well as those of the tenant. They’ll also take care of any maintenance issues, although you should approve all incurred costs (other than certain emergency repairs), in advance.
The property manager will also help you find the right tenant, conduct reference checks and make sure they pay their rent on time. It is important that you don’t interfere too much with tenants because there are laws that give them rights, so always try to respect them. You should however make regular independent inspections of your property to make sure that the tenant is looking after your investment but always go through your agent and give plenty of notice.
The good news is that the cost you pay to your managing agent is usually a percentage of the rent paid this is deducted from the rent you receive and is tax deductible.
4. Understand the Market and the dynamics of where you are buying
Consider what other properties are available in the immediate area and speak to as many locals and real estate agents as you can. They may let you know if one side of a street is considered superior to the other. Make sure you do the leg work and consult professionals you can trust.
It is also a good idea to find out what changes may be happening in your suburb and the local council can often help here. For example, a major construction next to your property could make it harder to find a tenant at the right price or a planned by-pass may mean traffic will be reduced and this may increase the value of your property quicker than expected.
5. Pick the right type of Mortgage to suit you
There are many options when it comes to financing your investment property, so get sound advice in this area as it can make a big difference to your financial well-being.
Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can make a big difference. Structuring your loan correctly is critical and this should be done with the help of a trusted financial adviser. It is recommended to avoid mixing up investment property loans with your home loan. Each loan needs to be separate so you can maximise your ongoing taxation benefits and reduce your accounting costs.
Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rate loan at the right time can really pay off. Remember that rates usually rise in line with property prices, so increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front.
Most investment loans should be set up as Interest Only (rather than Principal and Interest) as this increases the tax effectiveness of your investment, particularly if you have a home loan. You may also want to seriously consider an investment loan that gives you the opportunity of paying interest in advance, a redraw facility or an Offset Account
6. Use the equity from another property
Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage. Utilising the existing equity within your home can allow you to borrow more money against your investment property purchase, which will increase your tax deductions.
7. Negative Gearing
Negative gearing can offer property investors certain tax benefits if the cost of the investments exceeds income it produces. Australian law allows you to deduct your borrowing and maintenance costs for a property from your total income. However, you can only get a tax benefit if you earn other taxable income in the first place. So, while you are actually making a loss on the property, the advantage is that the loss can be used to reduce the amount of tax on your other earnings. However, as stated earlier, do not buy an investment property just to get a tax deduction.
8. Check the age and condition of the property and facilities
Even with negative gearing, needing to replace the roof or hot water service in the first few months of ownership could make a significant difference to your profits and really damage your cash flow.
It is therefore advisable to engage a professional building inspector before you purchase to conduct a thorough inspection of the property to find any potential problems.
It is also wise to use a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship.
It’s not always a bad thing to buy a property that is not in peak condition because you get the opportunity to improve the value of the property by renovating and this can increase your returns for both capital growth and rental income.
9. Make the property attractive to renters
Go for neutral tones and keep the kitchen and bathroom in good condition. Kitchens and bathrooms often make a property more saleable. You’ll find that you will attract better quality tenants if you have a well presented property. The last thing you want is a bad tenant.
10. Take a Long-Term view and manage your risks
Remember that property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better As you build up equity you can then consider purchasing a second investment property.
Finally, it is also paramount that your personal risk insurance cover is reviewed to ensure that if anything unforeseen was to occur that you and your family will be adequately covered.
If you have any questions, please contact one of our friendly advisers.