Buyer Information for Renters
How to buy an investment property?
The most important piece of advice when investing in the property market is to do your homework.
Check your finances
Assess your budget realistically so you know whether or not you can afford the monthly cost of an investment property. Fixed interest rate loans are very popular with investors as these allow you to accurately budget for your repayments, knowing your levels won’t increase. And because it’s only the interest that’s tax deductible, most investors believe that repaying more is not tax effective.
Always remember, your owner-occupier home repayments should take priority over your investment loan because your interest payments on your investment loan are tax deductible. We can advise you of the real costs of buying an investment property. In addition, our Home Loans consultant can show you how you can best structure your finance to maximise your returns.
Estimate your capital gains and rental return
While your choices regarding your homeowner property will be primarily influenced by emotional reasons (such as personal taste), your property investment will need a different approach. The best way to view your investment is in purely financial terms of risk and return. You need to consider both the rental return and the potential capital growth.
How long will you keep it?
It is important to have a plan upfront of how long you intend to hold your investment property. Most financial advisors believe that the minimum timeframe for investing in property is five years to allow sufficient time for capital gain.
Location, Location, Location!
There’s a reason why the catchcry, “location, location, location!” is such an over-used phrase: it’s because location is your potential trump card in property investment. Spending time researching areas before you invest can save you effort and wads of cash; and choosing the right areas is not as straightforward as it sounds! Put yourself in the shoes of your future tenants when deciding upon location; those who are renting usually value convenience, so include proximity to public transport, public amenities, shopping centres and parks in your choice. It can also be a good idea to buy property within convenient driving distance of your own home, so you can check on the property with relative ease.
Talk to the experts
Talk with us about vacancy levels, rental levels and expected future capital growth of the area. Make sure that you have a really good understanding of an area before you purchase a property in it.
Dot your “i”s and cross your “t”s
Reassess your budget with a view to gauging exactly how much you want to spend; of course, the choice of unit or house will have significant bearing on this. Units are generally a more popular choice for several reasons; less maintenance is involved, larger tenant demand and generally lower price range. Many investors look for newer properties where the maintenance is going to be less than older properties but find that depreciation tax deductions are higher.
Who looks after your property?
While some property investors choose to take the management of the premises upon themselves, most people prefer to arrange for a real estate agent to manage the property for them. We are fully versed in all aspects of property management and can assist you so that you can sit back and enjoy your investment. Remember that if you do decide to take up the role, there will be a number of aspects to consider: finding and vetting the right tenants, collecting and accounting for rentals, paying outgoings such as body corporate fees and rates, arranging maintenance work and conducting ongoing inspections. Think carefully about whether you’ll realistically have the time to cater to these pressing needs.
Assess the risks
Any entrepreneur will tell you that calculated risks are a necessary factor of the money game. In terms of property investments, the key is to balance risk against your projected returns. Be aware of the following risks before you buy an investment property:
1. Your property may prove difficult to let;
2. The rental may turn out to be less than you expected;
3. Interest rates could rise, increasing your repayments;
4. Maintenance costs may be higher than you budgeted;
5. Problems with tenants may arise creating unexpected hassles;
6. There may be no capital gain; or worse, your property could decrease in value;
7. You may have difficulty finding the monthly shortfall from your other income sources.
To succeed in property investment you need to devote time to some serious planning and preparation. However, if you are prepared to do your homework upfront, investing in property can be extremely satisfying as well as financially rewarding.
Negative gearing
The term “negative gearing” is classic jargon that is often misunderstood. An investment property is “negatively geared” when the mortgage interest and other tax deductions such as management fees, rates and maintenance costs are greater than the rental income.
This results in a net loss that may be offset against your other income (such as your salary) which then lowers your overall tax bill. In this way, the taxman as well as your tenant helps you pay for your investment property. And hopefully, your property is steadily appreciating in value. Most people feel more comfortable “gearing” or borrowing to pay for an investment property or properties than borrowing to purchase shares that are generally much more volatile.
