Property is a subject that dominates many a conversation in Australia. Talking about buying, selling or investing in property could even be considered a national sport! There are more opinions than actual investors, and for the first time property investor, the numerous views floating about can be confusing, overwhelming and off-putting.
Why invest in property?
Like any investment, the aim of investing in property is to increase wealth and secure your financial future. It’s a long-term strategy, not a get rich quick opportunity.
Property is generally considered a less volatile investment than shares. While you own the property you will receive a rental income. When you sell the property you’ll potentially receive a solid return on your investment due to capital growth. Ensuring this investment return has a lot to do with your initial research and purchase.
Research and plan your property investment strategy
Before purchasing a property, it pays to thoroughly research the market. Buying in an area you are familiar with is a good start. When conducting your research talk with other property investors, professional mortgage brokers, renters, and property management companies. Also, check out vacancy rates and potential changes in the area, such as zoning or future developments, that may affect the future rental potential of your property.
Do the math! Look hard at the income versus expenses equation. When you buy a property you need to consider the costs of buying – stamp duty, conveyancing fees, legal costs, search fees, pest and building inspections – in addition to the purchase price. Ongoing costs to bear in mind are council rates, water rates, insurance, body corporate fees, land tax, property management fees, repairs and maintenance costs.
Gearing – positively or negatively?
Borrowing to invest (which most first time investors do) is known as gearing. When doing your sums, you need to see if your gearing will be positive or negative. Negative gearing is when the rental income earned is less than the expenses and interest paid. Any loss here is offset against your taxable income thereby reducing the amount of tax you pay.
Positive gearing occurs when income is higher than interest and expenses. The extra earnings are added to your income and taxed accordingly.
Let your head lead, not your heart
When you are in the market for a family home, emotions often play a role in the final decision. So they should. It’s your home; the place you’ll spend many hours. Buying an investment property is a whole other deal. This is the time to take a totally analytical approach and not let yourself be swayed by feeling. All too often, first-time investors focus on a place where they can see themselves living and this is the wrong approach.
Remember this is business
Start small with a low maintenance flat or unit. Look for features that will benefit a broad range of potential renters – singles, couples, families, students. Does the property have a second bathroom? What is the proximity to transport, shops, and schools?
When taking your first step on the property investment ladder, look for a property that you can afford, that would suit a number of different renters, is in a highly sought after location, and will provide a good return when sold.
Managing your property
Unlike a term deposit, a property investment is not a set and forget it deal. You have two options when it comes to property management. You can do it yourself or appoint a property management agent. If you choose the former, you need to show the property, review tenant applications, manage rental income, organise maintenance and repairs, ensure return on investment, and comply with landlord regulations. Enlisting the help of a good property management company allows you to be guided by their experience and expertise, and the costs are tax-deductible.
You might also like to read our blog post: Co-owning an investment property.