Our Advice for Buying an Investment Property
In Australia today, property investment continues to be one of our favoured ways of achieving financial security. Australians consider this type of investment to be stable, real, and an investment where we have a degree of control. It’s true that securing your financial future through property investment should be about increasing your wealth; however, property investing is definitely not an instant road to riches. Managing your investment effectively allows you to enjoy the experience; it will also determine whether your investment property will help you reach your financial goals – or not!
The following points listed below are tips that you should keep in mind when purchasing an investment property –
Choosing the Right Property
Do your own research! Once you’ve chosen the area you wish to invest in, check out homes that have recently sold, and their selling price. You’ll very quickly understand the value of properties in your chosen area and how much people are willing to pay. That means you’ll know a good buy when you see it! Never, ever, consider purchasing real estate in an area that you’re not familiar with, especially without having done your own independent research.
You’re looking for a property that is likely to increase in value. It’s critical that the property you purchase is the right type of home, in the right location, at the right price, and it’s a home that’s a financial fit for your circumstances.
We know that real estate marketing companies promote properties at hugely over inflated prices to cover their high commissions and developer profits. We see this a lot in many high-rise apartments sold straight off the plan. If you should find a property that you’re interested in, but you’re unsure of its real value, it’s our suggestion that you arrange for an independent valuation. Some lenders will arrange for this valuation to be done on your behalf: having this information can often be a great negotiating tool!
By not cross-collateralising your properties and keeping your loan structure independent, your loan structure will be independent; thus giving you some protection should a lender’s valuation come in low and you’ve signed your contract ‘subject to finance’.
Mortgage insurers and lenders have access to valuable data on different property developments and locations, and a good mortgage broker will access this information for you to ensure you don’t choose the wrong investment property. Don’t ever purchase an investment property based purely on the anticipated tax deductions: stay focused on why you’re investing, and what your goals are.
In order to achieve the best possible results, you should ask yourself what kind of tenants (and possible future purchasers) will you be looking for? If, or when you decide to sell, these decisions should influence your purchasing decisions. Consider who will be prepared to pay more rent, be more stable, and drive future growth: will it be investors, homeowners, students, or families?
Understand (and Be Familiar with) Your Cash Flow
We know that for many people, investing in property has proven to be the path to long-term wealth. Understand that this is a longer-term investment that requires your commitment and belief in yourself. Be very sure that you can afford to maintain mortgage repayments over the long-term, remembering that the critical time is in the short-to-medium term, because generally wages and rents go up over the longer term.
The last thing you want is to be forced to sell your investment property in the wrong market due to personal reasons, like an accident or illness, and it’s our recommendation that you regularly review your personal risk cover, including life, accident and income etc.
Over time, things will get easier. Generally speaking, investment properties can be relatively inexpensive to keep, and servicing the loan will become more manageable because you’ll have income from rent; expenses are paid for prior to tax, plus you get a tax deduction on many expenses; including depreciation associated with owning the investment property. Also keep in mind that, over time, both rents and your own income will probably increase.
So, our point here is that selecting the right property for your specific circumstances can, and will, have a huge impact on your lifestyle and your cash flow.
Study, and become aware of the best ownership options for tax deductions involved in property investments. It’s vitally important that you receive advice from your Accountant prior to purchasing a property, because it’s a difficult and costly exercise to undo after you’ve made the purchase. Another point to remember is that interest rates vary over time, so fixing your rate may be an option to provide stability for a specific period of time. The great news for property investors is that, during times of increasing interest rates, you can generally expect to be able to increase the rent payments.
Employ the Services of a Good Property Manager
Make sure that the Property Manager you employ holds a Real Estate licence. It’s the Property Manager’s job to keep things running smoothly between the landlord and the tenant. In addition, they usually assist with finding good tenants, providing ongoing market advice, managing the ongoing relationship with your tenants, and ensuring you receive the best possible rent for your property. An experienced Property Manager will advise as to when rents should be left the same, and when rents should be reviewed.
Your Property Manager should also have the ability to offer advice on Property Law relating to tenancies. They must be able to advise you of your rights and responsibilities as a landlord, as well as the rights and responsibilities of the tenant. All maintenance issues, and this includes insurance claims, should be handled by the Property Manager; however, as the landlord you should approve all incurred costs in advance – with the exception of certain emergency repairs. It’s our recommendation that you provide the Property Manager with a pre-approved limit on how much money can be spent before they’re required to seek your approval. This figure might be (say) $200 per repair. This helps the Property Manager do his job quicker and more effectively, and of course it saves you time while creating less inconvenience for your tenant.
Many times we see investors trying to save a few dollars on management fees, ending up with a poor performing Manager who offers lower rents, ultimately costing them and a lot more. So go for value, don’t go cheap!
Again, Do Your Research! Understand the Dynamics of Your Market
Research other properties that are available in the immediate area, and take the time to speak to as many Property Managers and local Real Estate agents as you can. They’ll be happy to offer advice, and they’ll let you know what tenants are looking for and whether one side of the street is considered superior to another, and so on.
It’s up to you to do the leg-work and consult professionals you know you can trust. You can also gain valuable independent information from sources such as propertyvalue.com.au, domain.com.au, and corelogic.com.au. They can provide information on property values, average rents for that particular area, suburb reports and demographics.
There’s a lot of information that can be accessed on the Internet, but be discerning and don’t look at what is advertised for sale – just look for actual sales. Certainly, advertised prices may give you a guide, but generally they don’t sell for that price. It’s also a good idea to visit your local council to determine what changes may be occurring in your suburb. This will provide valuable advice because then you’ll know what to expect in order to create future plans for your investment property.
Choose the Right Mortgage for Your Situation
When structuring your loan, you’ll need the assistance of a competent and experienced mortgage broker. It’s vitally important that you’re not focused on saving a few dollars, but in achieving the right mortgage for your specific situation. At all costs avoid mixing up investment loans with your personal or home loans. It’s imperative that these loans be separated to enable you to maximise your taxation deductions and reduce your personal debt.
Another decision you will have to make is whether to choose a fixed rate loan or a variable rate loan. The answer to this will depend on your circumstances and what’s available in the market, but consider both these options very carefully before making a final decision. Fixed rates provide stability for repayments and cash flow, while variable rates offer flexibility: generally, most investors who purchase for the long-term don’t really require flexibility.
It’s generally considered that investment loans be set up as interest-only loans, instead of principal and interest, because this increases your cash flow and the tax effectiveness of your property investment. Interest-only loans work well for investment properties because they reduce your repayments to the lowest amount possible, meaning increased cash flow; plus, the entire interest repayment is tax deductible. However, with a principal and interest loan your repayments will be higher and the principal part is not tax deductible: the principal component will also be reducing your tax benefits as you pay down the balance of the loan. Your aim should always be to pay down your personal non-tax deductible loans first. Also, depending on the time of the year and your circumstances, you may want to consider an investment loan that offers you the opportunity of paying interest in advance; or one that can have a linked offset account.
Be Smart and Use Your Equity Wisely
Equity is the amount of money in your home that you actually own, and this figure is calculated by determining the difference between what your property is worth and what remains owing on the mortgage. When you leverage equity in your home or from another investment property, it can be a very effective method of purchasing another investment property.
Understand Negative Gearing (Yes, More Research!)
It’s very important that you understand negative gearing, and how it works. Negative gearing offers property investors certain tax benefits when the cost of maintaining the investments (including depreciation and interest) exceeds the income it produces. When you have a negatively geared property, the overall taxation result is that you have a net rental loss. When this occurs, you might be able to claim a deduction when you complete your tax return for the total amount of rental expenses against your rental and other income, like wages, salary, or business income. This means that when you negatively gear a rental property, the rental expenses you claim in your tax return could well result in a tax refund. Yes, you may be making a loss on the property, but the advantage is that this loss can be used to reduce the amount of tax on your other earnings. Of course you would not buy an investment property just to get a cash-flow loss for a tax deduction – the investment property still must be a good investment.
Check the Condition and Age of the Property
Hire the services of a professional Building Inspector to conduct a thorough inspection of the property you’re considering purchasing to locate any possible problems and to budget for initial repairs. The age of the property, and indeed its appliances, can also help determine what appreciation is available and how this might impact on your cash flow. Even if you’re negative gearing, repairs to the hot water service or replacing part of the roof within the first few months of ownership could make a huge difference to your profits. Property repair costs can really damage your cash flow, and that’s why we suggest you always use qualified tradespeople who are licensed and adequately insured to carry out any work on your property; thus protecting you against public liability and poor workmanship.
Make the Property As-Attractive-As Possible to Tenants
It stands to reason that when your property is well presented you attract better quality tenants. The home should be presented in a clean, neat and tidy manner. Ensure that the bathroom and kitchen are in good condition and ideally they will be in neutral tones. Don’t become personally or emotionally involved in your investment property. Certainly, some people say that it’s appreciated more by the tenant if your rental property is a home you’d be happy to live in yourself; however, our advice is that make sure you’re always able to emotionally differentiate between your own home and your investment property.
Remember that this house is the temporary home of your tenant, and not your own home. Property investing is basically the same as running a business – the business of managing expenses, maximising income, and providing a good home for your tenant.
Consider This Investment a Long-Term Investment and Manage Your Risks
Anyone going into property investing should understand that property is a long term investment. You certainly can’t rely on property prices increasing straight away, and if it should happen, then that’s a major bonus! The longer you commit to a property the better; then as you build up equity you can consider purchasing another investment property.
It can be a real challenge finding the perfect balance between financial stability and enjoying your life, and that’s why it’s very important that you understand, before purchasing, the cash flow before and after tax on each property. Of course we all wish for financial security, but property investing is a long-term investment. Be patient, enjoy your life, and don’t expect too much too quick.
And finally, be aware that, unlike managed funds or shares, you can’t just sell your investment property if you need access to money – it’s not as liquid. This means you should always keep some money in reserve for future needs. Be a little cautious, but optimistic also, because considering record migration levels and an anticipated housing and rental property shortage means that these are crucial factors in offering a huge advantage to property investors.
If you require further information or advice on how to structure your property investment purchase, or how to become a property investor, please feel free to contact us. We’re happy to help in any way we can!