10 Factors That You Need to Consider Before You Invest in Property
When you invest in property, you need to choose your investments strategically and smartly – without emotional input. You also need to be aware that maintaining your investment is an ongoing concern.
Here are 10 factors to take into consideration before you pursue property investment.
Investing in property is one of Australia’s favorite ways to invest. But owning an investment property should increase your wealth and secure your financial future – otherwise, why are you doing it? Many budding investors wrongly believe that property always delivers positive returns; however, when poor investments are made, you could put yourself in a worse financial position than when you started.
#1 Choose the right property at the right price
Property investment is all about capital growth, which means that you need to choose a property that is likely to increase in value.
This can be really difficult to gauge, so you will need to do some thorough research on the following:
- Areas seeing growth;
- The demographic of the neighborhood (to ensure that you purchase a property that is likely to appeal to existing residents);
- The median price of properties in the area; and
- Whether the property needs repairs (and whether the cost of those repairs can be accounted for within your budget).
By investing your time in this research, you will soon learn which properties are likely to make valuable investments.
If you find a property you like and are unsure of its true value, contact a local real estate agent, such as Jim’s Real Estate, to obtain an independent valuation.
Once you are armed with this information, you can often use it as a negotiating tool.
#2 Keep cash flow positive
Investing in property is a successful investment strategy, but you should consider that property investment is only worthwhile in the long term.
Before you see any income on your investment, you will need to make sure you can afford to maintain your investment in the near future; otherwise, you may find yourself in the unfortunate position of selling at a loss.
An investment property doesn’t have to be expensive to maintain, as you will earn rental income and benefit from tax deductions to offset costs.
But you will need to be prepared to cover land rates, upkeep costs and renovations as they come up, not to mention planning for the event that your property is untenanted for a time.
#3 Find a good property manager
A property manager is a licensed real estate agent whose job is to keep your rental investment in order.
They are there to:
- Liaise between you and your tenant;
- Advise you when you should review rental costs;
- Manage rental inspections;
- Make sure your property is being taken care of;
- Chase up late payments; and
- Advise you of your rights and responsibilities as a landlord.
The cost you pay to your managing agent is usually a percentage of the rent paid, deducted from the rent, and is also tax deductible.
#4 Understand the market and the demographic where you are buying
Compare the property you are considering buying to other similar rental properties in the same area to determine whether your investment will succeed.
It’s also a good idea to speak to the local residents, who are the only ones who will know the intricacies of the neighborhood.
Is one side of the street considered to be better than the other?
Is there a house two doors down that hosts loud parties every weekend?
Talk to as many agents and locals as you can before deciding on a property.
It is also good to determine whether any significant developments are planned for the area.
While these changes can ultimately be positive, tenants may be reluctant to live next door to years of building work.
#5 Choose the right mortgage
There are many options for financing your investment property, so make sure you get good advice before committing to one lender or interest rate. The difference can save you hundreds of dollars a month.
Structuring your loan correctly is critical and should be done with the help of a trusted financial advisor.
It’s a good idea to keep your personal home load separate from an investment property loan so you can maximize your ongoing tax benefits and reduce your accounting costs.
#6 Use the equity from another property
Equity is the amount of money in your home minus any repayments you owe on a mortgage. If you already own a home, whether your primary residence or another investment property, you can use the equity from that property to leverage your next investment property.
Using the equity in your existing home can allow you to borrow more money against your investment property, which will increase your tax deductions.
#7 Negative gearing
If the investment cost exceeds the income it produces, investors can benefit from certain tax advantages.
Australian law allows you to deduct your borrowing and maintenance costs for a property from your total income.
However, you should be aware that you can only get a tax benefit if you earn other taxable income.
So, while you might be making a loss on the investment property, the advantage is that you can use the loss to reduce the amount of tax on your other earnings.
#8 Check the fine print
Even a property in perfect condition can end up costing you in the long run.
If you don’t carefully read the contract of sale, you could easily find yourself the owner of a property subject to liens or illegal encroachments.
Hire a reliable property conveyancer as soon as you find a potential investment property so that they can thoroughly go over the contract and investigate the property title.
This can potentially save you thousands of dollars, plus the hassle of fixing these errors in the future.
#9 Make the property attractive to renters
Would you be happy living in the house yourself?
Even if the property is structurally sound, quality tenants may be put off by musty carpets, broken tiles and uniquely coloured walls.
Before you buy the property, consider whether the cost of hiring a local handyman to make these improvements is within your budget.
#10 Manage your risks
Always remember that property is a long-term investment; you can’t bank on property prices rising straight away.
The longer you can afford to commit to a property, the better.
You’ll build up more equity and be in a better position to make further investments.