Categories: Personal Finance
Buying an investment property can be an attractive venture for many home buyers as the accumulated equity can be used towards a deposit. With the Australian Taxation Office reporting one in seven Aussies own at least one property as an investment, it can be an extremely rewarding albeit long-term investment. The right time to invest has less to do with market trends and more to do with seizing a great opportunity. For those waiting for prices to hit rock-bottom, consider the fact that you can never really know when they have.
Doing your research
You’ve found a property you love. Suddenly your emotions kick in and the last thing you want to do is step back and consider the risks. It is essential, however, that you take a rational and analytical approach. The reality is that while investing in property may seem like a fail-safe option, not all properties are created equally. Ultimately, the goal is to find out as much information as you can in order to manage risks effectively.
Choosing an area
Getting to know the sales history in the area is essential. While history is not a guarantee, it does give us a lot of useful information. Be prepared to look back, as far as 20 years, and view the growth. Get to know the ‘good’ and ‘bad’ parts of the suburb and aim to look at the area and any properties of interest through the eyes of a renter.
Consider looking into spillover areas – suburbs adjacent to more affluent areas that look set to take on an overflow of buyers. The age-old sea or city areas are still popular, although as the economy changes so too do the properties in these areas. Some seaside locations have seen prices rise as baby boomers buy up in retirement, while others have fallen with hard economic times forcing owners to sell holiday homes.
Ideally, look for an area with easy access to the CBD but with limited development opportunities, particularly for large apartment complexes that could compete with your property in the future.
Remember also to find out about the rental market in the area, not just the buyer’s market, and ask how the area will affect renting your property.
Choosing a property
Aim to choose a property with appeal to a large market. Buying near transport, shops and schools is ideal.
It can also be a good idea to look into improvements, which could increase returns. However, budgeting for any renovations must be considered. Even some things such as fresh paint and carpet can make a big difference when attracting renters. Neutrality is the key; aim to please the masses.
Consider your cash flow
As the saying goes, it takes money to make money, and when it comes to investment property, ongoing financial outlay is a given. Expenses to consider include maintenance, repairs and interest rises, as well as funds to cover times when the property is not tenanted.
In the early days, it’s unlikely that an investment property will generate enough rent to cover mortgage repayments, so backup funds are required. While you can claim some of the losses on your tax return, you can only claim up to an amount equivalent to your marginal tax rate. Reliable and long-term tenancy agreements can mean a secure income, so enlisting an agent can be a good idea.
Don’t be afraid to seek advice and speak to your accountant or an independent adviser. Many larger agencies also offer free research reports, so take advantage of this and get as much information as you can.