Many Australians view owning rental property as a logical entrée to investing. It certainly can be a good start, or part of an ongoing investment program. Investing in property is often considered a “safe haven”, especially when compared with the more volatile stock market and other investments. But buying a property (in theory, just like buying your own home), and putting the rent cheques in the bank are oversimplifications of the opportunities, processes and challenges of owning an investment property.
‘Knowledge is power’ – this adage certainly applies if you want to make smart planning and smart choices for investment properties. As a savvy investor, you will initially want to know the benefits and challenges of owning investment property, where to buy, what the rental market is, and whether to consider buying a unit or a house.
Benefits – include lower volatility, rental income, capital growth benefits potential, interest on the home loan, offsetting of property expenses against rental income, investing in something tangible.
Challenges – rental that fails to cover mortgage payments and other expenses, increase in interest rates on your loan, periods of vacancy, devaluation of property in an economic downturn, high entry/exit costs (stamp duty, legal fees, and real estate agent fees).
Additional costs – title search fees, pest/property inspection reports, council rates, water rates, insurance, body corporate fees, land tax, property management fees, repairs, maintenance, and renovation costs.
Let’s take the emotional charge out of your investment property and treat it like a business, because it is a business. It becomes a business the moment you begin searching for likely properties.
Budget – look at your investment budget: what are you able to put up front toward the purchase of the property, and how much will you need to borrow? Does that leave you any cushion for repairs and unexpected expenses, cost of preparing the property for rent, insurance, advertising the unit, etc.? What do you expect to realise in rental yield/profit? Will you manage the property yourself, or hire an agency?
What reserve do you have to cover any extended period of vacancy?
Research– what are areas of possible investment opportunities? (You might begin searching in the neighbourhood where you live.) You can learn a lot about properties, including values, vacancy levels, neighbourhood lifestyles by doing online research.
Learn as much about area trends and property cycles as you possibly can.
Use the websites available through the Australian Taxation Office to learn about taxes related to investment properties and income generated from them.
Checklist – make a checklist of pluses/minuses for each property.
Include: proximity to convenient shopping, quality schools, reliable transportation, entertainment district, and metropolitan area. Is the property in an area of upward transition, a high-rental district, and is there diverse industry or does the economy of the area centre around a sole industry?
Also on your checklist should be details about desirable aspects of each investment property such as view, balcony, proximity to water and recreation areas, amenities included in a Body Corporate residence, etc.
Value – what is the potential value on your investment property? The value will depend on location and housing market fluctuations. As one commercial real estate investor stated, “The best principle to have in any real estate transaction is that you make your money when you buy it, not when you sell it — because if you pay too much for it, you’re never going to make money.”
Do your research and planning. Build your investment property knowledge base. And before you make any major moves toward a purchase, consider contacting the expert financial advisors and planners at ProAdviser.com.au. They can help you build a strategic investment plan to help you realise your investment property dreams.