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Top 10 Tips Before Buying an Investment Property from Properties4U

Property investment still continues to be one of Australia’s most favoured ways of achieving financial security. This type of investment is considered to be real, stable and you have more control. Securing your financial future through investment property should be about increasing your wealth. However, property investing certainly isn’t an instant road to riches. Effective management of your investment will allow you to enjoy the experience and will determine whether or not the investment will help you reach your financial goals.

Check out these 10 things you need to keep in mind when buying Australian properties:

1. Choose the right property. 

Do your research, check out what homes have recently been sold for in and around the area and then you’ll discover that you’ll become more aware of a property’s value and how much people are willing to pay. You’ll know a good buy when you see it. Never consider purchasing real estate in an area that you are unfamiliar with, especially without doing your own independent research.

Choose the property that is more likely to increase in value. Buy the property in the right location, with the right type of home, at the right price and one that is a financial fit for you is absolutely critical.

Real estate marketing companies are often promoting properties at prices that are hugely over inflated to cover their high commissions and developer profits. This is often seen in many high rise apartments sold off the plan. If you do find a property that you like and are unsure of its real value we suggest organising an independent valuation. Some lenders can arrange for an independent valuation to be done and this information can often be used as a good negotiating tool.

Keeping your loan structure independent by not cross collateralising your properties will also give you some protection if a lender’s valuation comes in low and you have also signed your contract subject to finance.

Lenders and mortgage insurers have valuable data on different locations, property developments and you may be able to get access this information from a good mortgage broker which can help you to avoid picking the wrong investment property. Whatever you do, never make a decision to buy an investment property based purely on getting a tax deduction – always focus on why you are investing and what you expect to achieve.

Knowing who will be your predominate desired tenants and possible future purchasers, if or when you sell, will influence the type and style of property in achieving the best results. Think about who will pay more in rent, be more stable and drive future growth, will it be families, homeowners, students, investors?

2. Be familiar with your cash flow!

Investing in property is a proven path to long-term wealth. It is a longer term type of investment that needs your commitment and structure to suit. Make sure that you can afford to maintain your mortgage repayments over the long term, the critical time is in the short to medium term as generally rents and wages go up over the longer term. You don’t want to be forced to sell it in the wrong market due to personal reasons, like illness or accidents and we always recommend reviewing your personal risk covers, including accident, life and income etc.

Expect things to get easier over time. Investment property can be quite inexpensive to keep and servicing the loan will become manageable because you’ll have rental income, expenses are paid for before tax, and you get a tax deduction on many of the expenses, including depreciation associated with owning the property. You also need to keep in mind that over time rents tend to increase as does your own income.

Check out this example to know who might pay the costs of owning an investment property. This example was based on two properties with similar purchase prices, one was an older established home and the other was a new home

Older Established Home

picture1

New Home

picture2

 

In the above graphs, the cost per week after Tax in the first year was very different for the two examples. The older established home had an after tax cost of $195 per week or $845 per month while the new home had an after tax cost of $2 per week or $8.70 per month.
In summary on this example your cost of holding a new investment property works out at only $2 per week. That’s less than a cup of coffee!

As you can see, selecting the right property for your circumstances can have a big impact on your cash flow and lifestyle.

Make yourself aware of the best ownership options for the tax deductions involved in property investing. Advice from your accountant before purchasing is vital in this regard as it is difficult and costly to undo after you have made the purchase. Remember that interest rates can vary over time, fixing your rate may be an option to give you stability for a period of time and the good news for property investors is that in times of rising interest rates you can normally expect to be able to increase the rent.

3. Hire a good property manager.

Make sure that your Australian property investment company holds a real estate licence. Property managers keep things in order between the landlord and the tenant. They usually help with ongoing market advice, finding good tenants, managing the ongoing relationship with your tenants and get the best possible rent for your property.  A good property manager will let you know when you should review rents and when you should leave rent the same.

A good property manager has the ability to give you advice on property law relating to tenancies. They must be able to discuss with you your rights and responsibilities as a landlord – as well as those of the tenant. Maintenance issues, including insurance claims should be taken care of by the property manager but you still need to approve all incurred costs (other than certain emergency repairs), in advance. We recommend giving the property manager a pre-approved limit on how much they can spend before seeking your approval, it might be up to $200 per repair, this helps the property manager get on with the job quicker, it is less inconvenient for the tenant and will save you time.

We often see people trying to save a few percentage points, ($9 per week) on the management fees, to then end up with a poor performing manager who takes lower rents and it ends up costing them $30 per week. Don’t go cheap, go for value!

4. Understand the dynamics of your market.

Consider what other properties are available in the immediate area and speak to as many local real estate agents and property managers as you can – they’ll let you know if one side of a street is considered superior to the other and what tenants are looking for. Make sure you do the leg work and consult professionals you can trust. Accessing independent information from a source such as corelogic.com.au, propertyvalue.com.au or domain.com.au can give you information on average rents, property values, demographics and suburb reports.

You can access a lot of information on the Internet, be discerning and look for actual sales not what is advertised for sale. Advertised prices give you a guide but they generally don’t sell for that price. Another good idea is to find out what changes may be happening in your suburb and local council. This will help you know what to expect and to create future plans in relation to your property.

5. Pick the suitable type of mortgage

Keep in mind that structuring your loan correctly is more critical than saving a few dollars and should be done with the help of an experienced and competent mortgage broker. Always avoid mixing up investment loans with your home or personal loans. These loans need to be separated so that you can maximise your taxation deductions and reduce your personal debt first.

Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances and what’s available in the market, always consider both options carefully before you decide. Fixed rates will give you stability in repayments and cash flow while variable rates will give you flexibility, most investors who purchase for the long term don’t need flexibility.

Most investment loans should be set up as Interest Only (rather than Principal and Interest) as this increases your cash flow and the tax effectiveness of your investment. The reason Interest Only loans work well for investment properties is they reduce your repayments to lowest possible (increased cash flow) and the whole interest repayment is tax deductible. With a Principal and Interest, your repayments are higher and the principal part is not tax deductible. The principal component is also reducing your tax benefits as you pay down the balance of your loan. Always aim to pay down your personal non tax deductible loans first. Depending on your circumstances and time of the year, you may also want to consider an investment loan that gives you the opportunity of paying interest in advance or can have an Offset Account linked to it.

6. Use your equity wisely

Equity is the amount of money in your home that you actually own. This is calculated by working out the difference between what your property is worth and what you owe on the mortgage. Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property.

If your home is currently worth $650,000, and you have $250,000 outstanding on the mortgage, you have $400,000 worth of equity. Most lender will allow you to access up to 80% without lenders mortgage insurance (LMI) and 90% with LMI. In this example at 80% you could access $270,000 (80% of $650,000 less existing balance of $250,000). Accessing the equity in your existing home with a separate mortgage can allow you to borrow more money against your investment property, which can reduce the risk against your home and help fund more properties.

7. Learn about negative gearing

Know more about property gearing, negative gearing offers property investors certain tax benefits when the cost of running the investments (including interest and depreciation) exceeds the income it produces. The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income, such as salary, wages or business income, when you complete your tax return. Thereby negatively gearing a rental property, the rental expenses you claim in your tax return could result in a tax refund.

So, while you are making a loss on the property, the advantage is that the loss can be used to reduce the amount of tax on your other earnings. However don’t buy an investment property just to get a cash flow loss for a tax deduction. The property still has to be a good investment first.

8. Check the age and condition of the property

Engage a professional building inspector to conduct a thorough inspection of the property, to find any possible problems and for budgeting initial repairs. The age of the property and its appliances can also determine what depreciation is available and how this may impact on your cash flow.

Even with negative gearing, replacing the roof or repairs for the hot water service within the first few months of ownership could make significant difference to your profits. Cost for property repairs may really damage your cash flow. That is why it is also wise to use a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship and public liability.

9. Make the property attractive to tenants

You will attract better quality tenants if your property is well presented. Make sure that you have a neat and tidy home. It is best to keep the kitchen and bathroom in good condition and make sure that they are in neutral tones.

While some people believe that it is appreciated more by the tenant if your property is a home that you’d be happy to live in yourself, it will be much better to think about differentiating between your own home and your investment to avoid becoming overly involved. Keep in mind that it is the temporary home of your tenant and not your own. Property investing is the same as running a business, managing expenses, maximising income and providing a home for your tenant.

10. Take a long-term view and manage your risks

Remember that property is a long-term investment and you should not rely on property prices rising straight away, if it does happen treat it as a bonus. The longer you can afford to commit to a property the better and as you build up equity you can then consider purchasing a second or third investment property. Finding the right balance between financial stability and still being able to enjoy life can be a challenge, that’s why it is so important to understand the cash flow before and after tax on each property before purchasing. Financial security is very important but life is not just about getting more – don’t get to eager too quick.

Finally, remain aware that unlike shares or managed funds, you can’t just sell part of your investment property if you need money, it’s not as liquid. Keep this in mind right at the start so you can keep some reserves for future needs. In short, be cautious; however consider that record migration levels, reported housing and a rental property shortage are crucial factors giving advantage to property investors.

 

Top 10 Tips Before Buying an Investment Property from Properties4UTo get individual advice on how to structure your property investment purchase and how to become a property investor, feel free to contact Properties 4U.

Click the infographic on the left to download.

 

 

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