Investing in property is easily regarded as one of the safest long-term investments for building wealth for your future. While the idea of buying a rental property sounds easy, there are plenty of things to consider before making a decision about what to buy, where, and when.
Before you head out hunting for a property to add to your investment property portfolio, here are some tips to help you with your decision.
Tip #1: Know your budget
Before you invest in any type of property, it’s wise to know exactly what your budget is. Take the time to speak to your mortgage broker about your potential borrowing capacity and know what your repayments will be. Work out the estimated rent you think you might achieve from your future tenants and then determine whether your income is sufficient to cover any shortfall in funds.
Tip #2: Research your intended market
Once you know how much you can potentially borrow, you’re in a strong position to start researching your intended market. You’ll know what price range to limit your hunting to and you’ll get a solid feel for the types of properties available on the market within your price range.
Tip #3: Know your investment strategy
You might know you want to invest in property, but do you have a defined strategy for achieving your goals? Some people prefer to take advantage of the potential tax benefits associated with negative gearing in the hopes that future capital gains with offset any short-term losses. Others prefer to generate cash flow from the rental income, while still others may prefer to capitalize on increasing the value of the property and selling it for a profit.
Before you begin investing in property, be sure you know your investment strategy and what you hope to achieve.
Tip #4: Choose the right property to suit your financial goals
Are you looking to buy a larger family home in the suburbs, a low-maintenance townhouse in an up-and-coming area, or an inner city apartment? Different types of property can play varying roles in your overall investment strategy
There may also be differences in your expenses. For example, a unit or apartment may have body corporate or strata levies to factor into your cash flow equations. An older home may have higher maintenance or renovation costs to consider.
Tip #5: Buy or build?
Many investors aim at buying an established home with the intention of generating rental income from the moment they receive the keys. Other investors prefer to build a brand new property to take advantage of the considerable deductions and depreciation benefits of owning a new home. Building a property can also mean waiting until construction is complete before leasing the place to tenants, so you won’t generate cash flow right away.
Tip #6: Understand the rental market
It’s common for many investors to buy properties they want to live in themselves. However, what you might find desirable in a property may not suit what your tenants want.
For example, you might find that filling the backyard with a pool is exactly what you want, but your tenants may not want the hassle or risk of a swimming pool with young kids. Likewise, a property up on a steep block might have stunning views, but might be impractical to some tenants who don’t like a yard broken up with retaining walls and various levels to negotiate just to go inside.
Of course, it’s important to ensure the property is attractive and appealing to prospective tenants. The objective is to determine what your tenants expect in a property, not what you want.
Tip #7: Find the right property manager
Plenty of new property investors believe they might be able to save a few dollars by bypassing a property manager and trying to manage their rental property on their own. However, a good property manager can save you time and money in the long run by doing all the hard work of looking after your investment on your behalf.
Your property manager doesn’t just find tenants to live in your property. A good manager will conduct regular inspections to ensure the home is being taken care of, collect rent, and act on your behalf if a dispute needs to be taken to the residential tenancies tribunal.
Take the time to research and locate the right property manager to work with you. Know what fees you can expect to pay for their services and factor in your expenses accordingly.
Tip #8: Choose the right mortgage type
Not all mortgages will have the same effect on your overall investment strategy. Do you know whether you’ll set your repayments to ‘interest only’, so the balance of your investment loan remains the same and you only pay the interest charges due? Or will you set your repayments to ‘principal and interest’ so that each payment you make starts to repay your debt a little more?
The type of mortgage you choose and your repayment options can affect your cash flow and your potential tax benefits. Take the time to discuss your options with a mortgage broker and speak to your account about the best option for your personal financial situation.
Tip #9: Do your calculations
Always take the time to do all your calculations before signing any contracts. It’s not always necessary to fully repay your own family home before you buy an investment property, but it’s wise to know how becoming a landlord can affect your financial situation.
It’s also a good idea to ensure you understand exactly what your mortgage repayments will be, how much rent you’ll receive after property management fees have been deducted, what ongoing expenses you’re expected to pay, and how much money (if any) will need to come out of your pocket to complete the purchase.
Tip #10: Buy with your head, not your heart
It’s easy to get caught up in emotions when you’re out house hunting. However, buying an investment property shouldn’t be an emotional decision. Rather, it needs to make good sense financially in terms of helping you achieve your investment goals. Be sure you’re buying with your head based on logical financial decisions rather than getting caught up with emotion.