Property is a popular choice when it comes to investing money, as it enables you to generate wealth not only through the future capital growth, but also through possible rental yield.
When buying a property for investment purposes, you are buying with financial goals in mind, unlike buying with the emotion you may attach to a home that you would be choosing to live in.
Property investing can be seen as a sound investment, as it is generally a low risk option when compared to building wealth via other investment options, however, when there is the ability to gain financially, there is also a degree of risk involved.
Before deciding if this is the right investment strategy for you, you will need to look at the risks and the benefits to evaluate the suitability of investing in property to your situation.
STEP 1 – THE OPPORTUNITIES AND OBSTACLES OF INVESTING IN PROPERTY
As with any major financial decision, there are potential opportunities (benefits) and obstacles (risks) involved when investing in property. It is important to way up those possible benefits with the risks and do what makes sense for you.
Below are some possible Opportunities and Obstacles to consider:
- Comfort in having a physical, tangible asset.
- Property tends to be less volatile than many other investment types and historically house prices have appreciated over time.
- There are advantages to be had in depreciation and tax deductions.
- It could eventually have the potential to become a second income.
- Opportunity to add to your investment with little outlay for a renovation.
- You can ‘set and forget’ if with a property manager, allowing you to build wealth without even having to think about it.
- Potential long-term return and future positive gearing.
- Access to equity for future investing.
- You could always live in the property if the investing did not work out.
- Rental income may not cover your total mortgage payment so you will need to pay the shortfall.
- Having no tenants could mean you are left having to pay for the total mortgage.
- You may have to deal with difficult tenants, especially if you manage the property yourself.
- If there is an emergency or something needs fixing it is up to you.
- You cannot access cash if you need it in a hurry as it is locked up in the asset.
- Interest rates can rise making repayments more expensive.
- The market you have chosen may not grow as much as you had hoped.
- Cost of buying and selling property is costly.
- No guarantees.
- Negative tax implications.
STEP 2 - IS INVESTING IN PROPERTY RIGHT FOR ME?
The idea of wealth creation through property is a great goal to set, but it is important to see if it is right for you.
If the opportunities outweigh the obstacles for you, and you think you would like to take the plunge, there are some further considerations to think about.
Becoming a Landlord
Buying a property to rent out makes you a Landlord. To become a Landlord there are some important thing you need to know.
- It is important to learn the rules and arm yourself with as much knowledge as possible, particularly educate yourself about Tenancy Laws, this way you are across anything that may arise.
- Do as much market research as possible.
- Are you good with things like repair and maintenance work? Will you be living close by to your investment property and have the time to fix things? If not, paying for tradesmen to attend to repair work can be costly and can eat into your profits. Be sure to have a financial cushion to cover it.
- Do you have a contingency buffer of funds to cover any unforeseen expenses that may arise?
NOTE - If you are looking to utilise any First Home buyer grants or concessions, find out the rules surrounding whether you need to spend any time living in the property before renting it out.
STEP 3 – SEEK PROFESSIONAL FINANCIAL ASSISTANCE
If you think you have the skills it will take to make a good landlord, you now need to see if you have the finances to match.
With such a large financial decision ahead, it is important to practice due diligence. Start with an analysis of your cash flow by creating a budget to see what you can afford. When creating your budget you need to look at all the income coming in and all the expenses going out to be able to assess you affordability.
Do you currently have any debts? If you do, then buying an investment property may not be right for you at this time.
You may feel comfortable assessing your finances yourself, however, many people prefer some assistance from an accountant or a financial advisor when looking at undertaking such a big decision as taking on an investment property, as it ensures that you make a well informed decision about your investment.
A financial professional will perform a risk profile with you to see what you can afford.
They will not only look at your financial position, but also at other things such as your superannuation fund and whether you have things like income protection and life insurance in place.
They will also be able to educate you on the tax benefits available with investing in property.
STEP 4 – COSTS INVOLVED WITH BUYING & OWNING AN INVESTMENT PROPERTY
Initial Set up Costs
After speaking with your financial professional, you will have an idea on whether property investing is a viable option for you. When you know how much you can afford to spend, if you have not already done so, you will need to get a deposit together.
Work on saving 20% of the total amount you would like to spend on a property as a deposit.
In addition to the deposit, you will need additional funds to cover things like stamp duty, legal fees, loan fees and building and pest inspections.
If you would like help figuring this out, please contact us and we can help point you in the right direction.
Property Owner Costs
Once you are the owner of an investment property, there will be many ongoing costs involved. Some of these items are:
- Shortfall of the mortgage (shortfall is the amount owing above what your tenant pays you)
- Rates or Strata (depending on the type of property)
- Water Rates
- Maintenance and Upkeep
- Annual fire safety fee
- Home & Landlord Insurance
- Property Management fee (if you are having a Real Estate agency looking after your home on your behalf)
Home & Landlord Insurance
It is necessary to protect your new investment, which is why it is important to look at what insurance is available.
Home insurance will cover the cost of damage to your house due to events such as fire, earthquake or storm damage.
If you are a Landlord though, as an addition, it is a good idea to consider purchasing Landlord insurance. This type of insurance usually covers lost rental income, damage to the property by a tenant and liability protection in case a tenant gets hurt due to a maintenance issue on your property.
Many people like to choose a Property Manager to manage their investment for them. For a low percentage of your rental income, your agent will advertise and organise tenants, check their references and even handle the co-ordination of any repairs that come up. This way you can just ‘set and forget’ while your investment grows.
When choosing an agent, it is always a good idea to go to 3 different Real Estate Agencies to review their fees and how they handle things and pick the one best suited to you.
STEP 5 – DEVELOP AN INVESTMENT STRATEGY/PLAN
When buying an investment property you need to have a plan. What is your objective?
- Will this be a short term (1-10 years) or a long-term (15-30 years) investment?
- Is the overall goal to renovate a property and sell at a profit?
- Are you hoping to buy somewhere that you hope will have a quick capital growth that you can sell quickly?
- Will you be holding onto the property for a long time?
- What type of property are you after? A 4-bedroom house or a 1-bedroom unit?
- What location are you interested in? (Both the type of property and location will steer you toward the type of tenant you are after.)
- Do you want to buy brand new? Alternatively, are you happy with a renovator (fixer upper?)
- What loan type will benefit your choice (e. g. The use of an interest only loan?)
- Remember the key to any property purchase is Location, Location, Location. It is ok to buy a nice house (and not necessarily the best house) when it is in a good location.
- Look for high growth areas. These are often upcoming areas where the population is growing and there are plans underway. You are looking for new or potential infrastructure. Often in newer suburbs and areas, you will see more of this than a suburb that has been long established.
- Find an area that has a low crime rate. Also, make sure you choose a property that has all the amenities people are looking for like schools, public transport close by, shops, parks and cafes.
STEP 6 – BUYING A NEW OR ESTABLISHED PROPERTY
You may be wondering whether it is better to invest in a new property or whether to buy one already established. The answer depends largely on the individual.
When you buy something brand new, there may be little that needs to be done before the property is ready to be leased.
The newer home will likely be much lower maintenance for years to come and may even come with a warranty or guarantee.
Tenants are generally willing to pay higher rent for a new property, which in turn can also attract a high number of applicants to select from.
Buying new can also offer excellent depreciation advantages that you can claim as a tax deduction.
Buying a new property can include buying land to build on, buying off the plan or finding a house and land package.
Buying an already established home means you do not need to wait for a new home to be ready.
You have the benefit of knowing that the location you are choosing to buy in has already shown growth in the past.
Older homes tend to have a reputation for having ‘solid bones’ and are often set on much larger parcels of land than the newer homes. They also offer a lot of unique character.
Buying an established home gives you great renovation potential.
It is good to look for something just below market price with minor repairs, which gives you the opportunity to make improvements that will add value to the property.
If it is your first property, it is not recommended that you buy something that needs a lot of work, unless you know a quality builder who does cheap work. (Do not be fooled into thinking it is as easy as it looks on all the TV shows.)
STEP 7 – DO YOUR MARKET RESEARCH
Once you have built your Investment Strategy, you can start your market analysis.
When you have chosen a location, it is a good idea to visit the council website for that area. Here you can find out information about the area including any upcoming plans like new or proposed infrastructure.
Contact real estate agents in the area, and ask what renters are looking for and what the rental prices are like in the area. Have them show you some suitable properties.
Go online to look up properties yourself to get an idea of what is out there and if that area is in your price range, and has all the things you are looking for.
STEP 8 – SEEK LOAN APPROVAL
Most of us are going to need to leverage some help when it comes to affording a property. To avoid Lenders Mortgage Insurance you’d need to save at least 20% of the total purchase price, but this can be difficult to achieve considering today’s house prices. Perhaps finding a guarantor is a more suitable option for you.
To help you with the remaining funds you will most likely need to seek the help of a lender.
It is important to shop around and find the best loan for you. Look at what features the loan can offer you along with the interest rates and fees and charges.
You might wish to take out an interest only loan if that is part of the financial strategy you have elected, or you might like your repayment to be fixed and not variable.
Find yourself a lender and get your pre-approval organised before you make any final decisions (or make any promises) on a property.
STEP 9 – LEARN THE LINGO
There are many terms you will hear used in reference to Investment Properties. Here are some important ones to know:
Capital Growth - Capital growth is how much the property’s value goes up over time.
Capital Gains Tax - If you sell a property for more than you bought it for, you will pay capital gains tax on the profit you made.
Depreciation - Depreciation is when there are tax deductions for the loss of value in the asset you own. You can claim deductions for depreciation on things like the building, improvements and fittings and fixtures.
Due Diligence – To investigate and assess all information for your purchase from every angle to evaluate what is the right decision for you.
Equity - This is what your property is worth, minus the money you owe on your loan. Equity can sometimes also be used instead of a cash deposit to purchase another property.
Negative Gearing – When your loan repayments are higher than the rental income you are receiving, this creates a loss that is called Negative Gearing. This loss is used as a generous tax deduction.
Positive Gearing - This is when your rental income is higher than what you pay in loan repayments. This generates an income for you.
Yield - Divide the total rent you receive over a year, by the price you purchased the property for. Times the figure by 100 to get the percentage. This is the yield amount.
STEP 10 – TAKE ACTION
It is time to Take Action!
Armed with this information you can feel confident to make a start on your property investment journey.
At Australian Mutual Bank, we are ready to help you!
Take a look at our attractive Investment home loan rates and generous features and speak to one of our knowledgeable and friendly team of Credit Specialists.
For all your insurance needs, we can get you protected.
If you are looking for a Financial Planner, and need help finding one, we can organise that for you as well. Did you know all our member’s receive their first visit with a Financial Planner free of charge?
This covers the details unique to Investing in property. For more information on the remainder of the buying process please refer to our Home Buyer’s Guide.