An investment property is real estate that is purchased by investors for investment purposes. Investors usually rent out the property and use the income received to pay off their loan with the intention of owning the asset and possibly generating capital growth by selling it for a higher price than the original purchase price.
An investment property can be in the form of residential such as house, unit and townhouse or non-residential such as land, commercial or an industrial property.
Purchasing an investment property is a popular choice for investors in Australia as the market can be safer and less volatile compared to other investments, however there are no guarantees and still has its disadvantages.
To help you begin your journey, here’s eight steps to starting a property portfolio on a solid ground, without losing your mind.
1. Check your finances
2. Get a loan pre-approval
3. Set your goals
4. Understand your attitude to risk
5. Start budgeting
6. Create a purchase plan
7. Be informed
8. Stay focused
Less volatility – Property can be less volatile than shares or other investments.
Income – You can earn rental income if it’s tenanted.
Capital growth – If your property increases in value over time you will benefit from a capital gain when you sell.
Tax deductions – Most property expenses can be offset against rental income, for tax purposes, including interest on any loan used to purchase the property.
Physical asset – You are investing in something you can see and touch.
Cost – Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs.
Interest rates – An increase in interest rates will increase your repayments and decrease your disposable income.
Vacancy – There may be periods of time where you don’t have a tenant and will have to cover all costs yourself.
Inflexible – You can’t sell off a bedroom if you need to access some cash in a hurry.
Lack of diversification – If property investment is your main investment you may have little or no diversification.
Loss of value – If the value of the property goes down you could end up owing more than the property is worth, this is known as negative equity.
High entry and exit costs – Expenses such as stamp duty, legal fees and real estate agent’s fees make buying and selling property very expensive.
What are you looking to achieve? What does success look like to you? Property investors generally invest in property to secure their financial future or to be free to do what they want, when they want it.
In order for you to achieve your goals, you must first articulate what your goals are. More importantly, you need to set a deadline as to when you want to achieve these. Then you can work backwards.
For example, if you’re looking to replace your income and retire on your investments within 10 years, you can start by creating a 10-year plan, broken down further to 5-yearly, yearly, bi-annual all the way down to weekly timeline. This way you don’t get overwhelmed by the enormity of the task.
Budgeting is not fun or exciting; it’s not even remotely interesting. But budgeting is the only way to ensure you’re able to balance your income and expenses. It allows you to see where you’ve been spending your money and helps you to plan for bigger expenses down the line.
There’s good budgeting software available, such as the handy MoneySmart tools TrackMySpend & Budget Planner https://www.moneysmart.gov.au/managing-your-money/budgeting
Make sure to set this up even before you start looking for a property.
This can be as simple as listing all your assets, including incomes and work out your household expenses and budget.
This will give you an idea how much surplus cash flow you have available to invest. Don’t immediately assume that you can’t afford to invest. As long as you have a stable and reasonably good paying job with solid employment history, you shouldn’t have a problem getting a loan.
Remember, maintaining a disciplined household budget is the key to successful investing.
Make sure you stay focused. Investing in property is a business decision, not an emotional reaction.
Get clear about what you want to achieve
Set a date as to when you want to achieve this goal
Identify milestones you need to do to get to your goals
It’s easy to get overwhelmed when you’re starting something new and as massive as property investing.
But don’t give up. Just imagine in 10 years, if you buy the right properties this year, you could be sitting back, feeling happy, secure and even proud that you bought properties that more than doubled their values while your peers and everyone else wishes they’d bought back in the day.
Familiar markets – Consider buying property in an area you are familiar with as it will take you less time to research. Check recent sale prices in the area to give you an idea of what you can expect to pay for local properties.
Growth suburbs – Look for areas where high growth is expected, where there is potential for capital gains. Property experts regularly provide tips on up and coming suburbs, just make sure you are aware of any biases they may have.
Rental yield – Look for areas where rental income is high compared to the property value.
Low vacancy rates – Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area. This may make it harder to rent the property and may make it difficult to sell in the future.
Planning – Find out about proposed changes in the suburb that may affect future property prices. Things like new developments or zoning changes can affect the future value of a property.
The property market moves in cycles. Property values may rise due to strong market growth, remain steady or even decline during certain phases of the cycle. Thus, as an investor it is important to know where the market is within the cycle to ensure you secure your property at the right price.
It should facilitate your goals of growing your portfolio to a point where it’s producing the growth or income you’re aiming for. It should serve as a structure for you to stay in the game.
Here’s an example of a purchase plan you can follow:
Define your strategy
Set up your criteria
Do your research
Cull your list
Do your due diligence
Make and offer and negotiate
You can get pre-approval through your lender directly or through your trusted mortgage broker. Going through a broker before applying for a pre-approval can be beneficial if you’re not sure you’re financially ready to invest.
Applying for multiple pre-approvals is not a good idea. Each time you apply, the lender will check your credit record. If there are multiple inquiries, this sends a red flag to the lender and may refuse your application.
Find out if you qualify for a loan
Check your credit rating
Consider reducing your debt or credit card limit
Your risk profile will dictate your strategy. What sort of risk can you tolerate?
Getting an understanding of your own attitude to risk will help you create a strategy that reflects this.
Investing in property needs to be a long term strategy whereby you aim to hold the asset for greater than 10years to mitigate the various risks associated with investing in growth assets. Budgeting is the only way to ensure you’re able to balance your income & expenses and be better prepared to maintain your investment strategy.
Borrowing to invest is not for the faint hearted. The more you borrow, the greater the risk becomes as you have to repay the loan regardless of the performance of the investment.
Here are some of the major risks of borrowing to invest. You need to understand and have a plan to deal with each risk. If you are not entirely comfortable with these risks, borrowing to invest may not be right for you.
Investment income risk – The income you receive from the investment may be lower than expected. For example, a company may not pay a dividend or a tenant may default. Do you have funds set aside to cover this?
Interest rate risk – Interest rates on the loan could rise. If they rose by 2% or 4%, could you still meet loan repayments?
Income risk – What if your income ceases due to sickness, injury or redundancy? Do you have a plan to manage this?
Capital risk – The value of your investment may fall and the proceeds from the sale may not cover the remaining loan balance. Do you have other funds set aside for this?
Most people will borrow to invest in property. This is called ‘gearing’. Negative gearing is where the income from your investment is less than the expenses. Positive gearing is where your income from an investment is higher than your interest and/or other expenses.
Property Drive is a boutique Buyers Agency and Investment Property Adviser service. We specialise in researching, searching and selecting residential property for our clients.
We assist home buyers and property investors who:
are busy and struggle to find the time to adequately find the home or investment property they want,
are having difficulty negotiating to buy a property before, or at auctions
aren’t sure where they should be buying their investment property
Simplicity – We do the hard-work required when buying a property that is usually time consuming, frustrating and sometimes very confusing.
Access properties that you would never have known about, including private sales and those properties yet to be listed.
help you find properties that have promising capital growth potential.
Save you time and money so you only have to look at properties that meet your criteria.
Confidence – We help you to know your criteria and the right property type so you feel well prepared to make the right property choice
Speed and Competence – When we find a property, we act swiftly, engaging the best people conduct the due diligence needed to be in a position to buy the property with minimal risk