Property investment is one of the most loved investment opportunities to generate wealth and secure their future. There are thousands of property investment opportunities in various cities and suburbs but that’s what makes it crucial to understand how to choose a better housing property according to your requirements and budget.
Choosing a successful investment property is not as easy as shopping, it takes months of research and expertise to make a well informed decision. Though there are no perfect set of order or rules to profit making property investment, there sure are some prerequisites that shall be considered while choosing an investment property.
Before we start we would like you to understand that the forward mentioned details are all based on our research and shall by no means be considered as professional advice. So, you must seek a face to face conversation with an expert and then make your final decision based on your due diligence.
Let’s get aboard now!
15 THINGS TO REMEMBER WHILE BUYING AN INVESTMENT PROPERTY.
- Thorough Research:
In a world full of Right and Wrong, Good and Bad information or advice, Research is the only factor that saves you from falling in potholes. So one must not be negligent while researching. Try to visit as many blogs as you can and look at all the perspectives. Also check into the news as that is a good source of keeping posted about all the happenings and analyse what can work in your favour. It is said that smart investors can analyse the future values of properties by analysing the current market positions and developments coming up.
Do not limit your research only to the information available on the internet. You may also like to talk to fellow investors and understand the real situation of the market and how much it has been helpful to them.
Take as much as time you can or want to be doubly sure about your investment. Do not race up at this stage. At the same time, do not become a prey of Too Much Information that you end up in not taking any action even though you could have.
Location is a game changer factor as well. When a property is bought in the right location, it can make all your dreams come true over a period of time. Along with this timing is also something that you shall keep in mind.
The location factor here includes multiple things like neighbourhood, amenities, schools, crime, future developments, median price range, median weekly rents, proximity to CBD, restaurants etc.
As per your purpose, you may look into the neighbourhood. Different neighbourhoods attract different kinds of tenants. Let’s say you plan to invest in Brisbane and closer to any university, then the tenants will probably be the students and due to that you may need to fill vacancies frequently. At the same time if you are investing closer to commercial hubs then the tenants would probably be more of working professionals. So plan accordingly and wisely.
Similarly the other above mentioned factors also contribute to the valuation of the property.
- Rental Yields:
Choose your rental property investment strategically. Rental yields constitute a large part in your income strategies. So you need to keep a track of the gross and net rental yields of previous years and current year as well. Rental yields fluctuate based on the DSR of the particular areas hence, stay updated on that.
Net rental yields will provide you better accuracy as it will include the expenses as well.
When it comes to rental yields, you may also explore a unique opportunity of investing in NDIS SDA properties (Link to NDIS SDA – an exclusive investment opportunity). These properties can provide you the highest rental yields compared to the market rates and it is also backed by the federal government.
- Demand to Supply Ratio and Scarcity:
Demand to Supply Ratio plays a vital role in determining your rental income. This can also be termed as vacancy rate. If you want to earn more then you have to select a suburb or property where the DSR is really good by which we mean that the demand is higher than the supply. The location preferably closer to all the amenities, schools and workplace is more favourable here as well. You must analyse the recent vacancy rates data to understand which property can be better to invest in. Good DSR helps you negotiate and get higher bids on your rental property.
- Put on the specs of Tenant (Think like a tenant to understand what they want):
Looking at a market with the eye of a tenant is always a wise act as it provides you with their perspective and helps you choose a better property. It is said that to catch a thief, you must think like a thief. Similarly to find the best possible option for your rental property investment you must think like the audience you will rent the property to.
You shall invest in the property which is lucrative to the tenants. For this you shall also know the tenants i.e . you shall dig into your target audience. Some suburbs might have more number of students residing, some may have more number of working single professionals and some may have lovely families residing in. The characteristics, requirements and paying capacity of all the tenants differ and that also impacts the DSR and rental yields. You can also modify the property to make it suitable to the tenants.
- Capital Growth:
Capital Growth in general terms means the value of Property that you gain when you sell it off. To gain maximum Capital Growth, you must hold on to your investment property for a period of time. A good strategy to follow here is to invest in a property at its lower price and then hold on to it for the long-term. At the same time you must analyse its past records, even though it is at a lower price there must be growth in it. Also, not all the low priced properties will give you good capital growth. We suggest you follow this tip only after your detailed research.
In short, in the end you are going to sell your property so it shall come with a good capital growth. A property market will not always show positive outcomes, there will be fluctuation and increase-decrease in the value of property. Here a thorough research on property’s past years performance can be helpful.
- Cash Flow Analysis:
Cash Flow means the total amount of money being transferred into and out of a business, especially as affecting liquidity. Cash flow is generally two kinds, one being Positive Cash Flow and another one being Negative Cash Flow.
Positive Cash Flow is where the rental income is higher than your expenses thereby allowing you a good income.
Negative Cash Flow is where the expenses are higher than the rental income. Though it may sound a little odd, many investors follow the practice of Negative Gearing to save taxes. Negative Gearing is only advisable if you can afford to bear the losses for a period of time.
So, take into consideration all the bits of expenses and charges that can be thrown your way while buying the property. Then, forecast your income against these expenses. This will help you understand and analyse how much profit or loss you may gain or incur in your chosen property. So analyze multiple options with this tip and understand what works best for you. This will save you from a lot of bewilderment and wasting time on non-profitable properties for you.
- Hiring Expert Property Managers:
Any intelligent and expert investor will suggest you to hire an excellent team of Property Managers. You may agree that one cannot manage everything by yourself because that will lead you away from your main purpose and eventually you may get trapped in the cycle. Hiring an expert Property Manager can do all the work for you from finding the tenants to collecting the rents for you and keeping your property under continuous inspection.
A seasoned property manager knows their area and works very well and already keeps in touch with the possible tenants and has other connections too which can be helpful to you.
But in this cut throat competitive world, there are dozens of Property managers claiming themselves to be the best. How will you understand who is better?
The simplest answer to this question is you check the portfolio of the Property Manager you have shortlisted to hire. Have a look at their previous relevant work and see whether or not your desired qualities and abilities are there in them.
Also check how quickly they respond to you and check their knowledge as well as if they are experienced and highly knowledgeable your work will reduce to a large extent.
- Prepare a strong Financial strategy and plan:
Buying an Investment Property shall purely be a financial decision. Here you have to follow numbers, facts and figures instead of heart.
A Financial Plan needs to be very accurate because it is finally going to help you understand whether or not your chosen property is affordable to you and will it be as profitable for you. Keep long-term investment in mind and set a provision for all the probable risks that may take place in that long period.
A strong financial strategy shows you the mirror of reality hence, while preparing the strategy you must consult an excellent accountant who will assist you with the right strategy taking into account all the ups and downs and other strategies, expenses and incomes.
Check for the Land to Building value ratio. Land value shall be above 50% in comparison to Building Value. Building’s value tends to depreciate over a period of time hence, the maximum Capital Growth relates with better valuation of land.
Understand that the major part of making your investment decision precise and accurate is based on a Financial plan. Therefore, an investment decision is as good as your finance plan.
- Learn more about Loan and Mortgage:
Isn’t Loan a tricky and vast topic to discuss? Yet, if the loan is planned and approached carefully then it can actually prove a good strategy to keep your finances flowing for future investments too.
Now, you can finalize amongst Principal-and-interest or interest only.
Wiser strategy is to move towards the Interest-Only Loan option. As the name suggests, in the Interest-Only loan option you will have to pay only towards the interest of the mortgage monthly for the set period of time instead of paying directly towards the principal. Once that time is overruled , you may be able to refinance your loan, and pay off the principal in a lump sum amount. Hence when you plan your loan and mortgage part be very precise and careful in choice because it can be a table turner for your revenue.
To make your investment yet much better you shall opt for Pre-approval of loan by getting paperwork done beforehand. This will save you from falling into the wrong pricing strategy or from paying the amount that can be out of your pockets. This is recommended strongly when it comes to buying property in auction. To understand the actual worth of the property, this is a brilliant idea.
Last but not the least, choose the mortgage that suits you best.To find what works best for your investment property, get in touch with a professional financial advisor.
- OFF-THE-PLAN properties:
Off-the-plan properties are sort of look-alike feel-alike properties. Off-the-plan properties are the properties which are still under construction or only on paper yet. Off-the-plan properties come with risks and way high competition.
Off-the-plan properties generally cost less to the developers and hence are cheaper to purchase. At the same time due to similar features it becomes difficult to manipulate the prices and with the competitive factor the vacancy rate could be higher as well.
Therefore an investor needs to choose the off-the-plan properties very carefully or may not invest in it.
Off-the-Plan properties surely have their own pros and cons:
– If you are planning to hold the property for a really long-term duration then it could be a good option.
– Also, Off-the-plan properties are helpful in tax deductions as the wear and tear costs are well depreciated in terms of Off-the-plan property.
– Off-the-plan property allows you more time to save money as initially you have to pay only 10% of the actual price and rest to be paid at the time of final outcome which may take months or years.
You must not forget that Off-the-Plan is super risky too as you do not have any idea when and how the property is going to turn out or even in some cases if it will be established or not. This drawback can be eliminated by thorough and right research.
A lot of seasoned investors advise not to invest in Off-the-Plan properties. And we agree to that but we also suggest if the research is worked out properly it can be worth investing.
- Beware of Rosy or too-good-to-be-true kind of deals:
Don’t discounts and lower prices and attractive offers make us all happy and jumpy? Well! They are surely very appealing. But always be on red alert if this appeal is extreme and feels hard to believe. If you research your way from ground, you will catch the idea of which property is too good to be true and which one is real potential. Here you must analyze what kind of property it is and the location and who the tenant is, and the demographics of the particular area. You must understand and compare the prices of nearby properties as well instead of flowing in the deal. Sometimes there could be some problems with the property due to which the existing owner is ready to give you an above hand for the deal. Speak with neighbours too for your assurance.
Do not fall for all Rosy pictures of the deal without applying your intelligence to it.
- Is Buying a better option or Building?
A major proportion of investors approach the Buying concept as it is more easy and instantly available thereby starting their income immediately. Both Buying and Building have their own ups and downs. See! Nothing is right or wrong, the only difference is are you aware of the potholes? If yes, then despite those, would you approach it? That’s what you need to make your mind up for. We state reasons supporting both the cases, rest you may research well.
Building a house or apartment provides you freedom to mould it as per your choice. You can get it constructed with all the modifications that a tenant may prefer and be ready to pay more for.
Based on your choice of house, building a house can cost you less comparatively.
Newer properties are also entitled to additional building tax deduction (Seek expert advice) which may vary leading max up to a 2.5%. Apart from this if you hold the property for an year a 50% tax deduction is claimable on Capital gains.
To understand more on how you can save taxes on your investment property please check How to save tips for saving tax on your investment property(Link of the same)
Buying a property allows you freedom to choose the best of the best locations. This freedom may allow you to gain more in terms of rental yields as per the suburb choice.
Similar to Building a property, you can claim tax deductions in bought houses as well.
Buying a house or property aids your income pipeline immediately. Whereas in building you have to wait for it to get ready entirely.
Now, you may choose wisely as both are cool to invest in based on various purposes and perspectives. If you are planning on investing in multiple properties, you can follow the practice of buying some and Building few on the basis of the location and other factors.
- Understand depreciation:
If you cannot increase your income, you can at least decrease your expenses. Depreciation helps in the exact same way. Claiming depreciation properly can save you thousands of dollars in income tax. Though depreciation is an extremely complicated concept to understand with a set of rules levied by ATO, knowing it in depth can save you taxes thereby making a huge difference.
Depreciation can be claimed on various expenses and set off against your income during taxation. The following factors add to depreciation benefits:
- Rental income
- Legal expenses
- Repairs and Maintenance Costs
- Depreciation of all kinds
- Property managers and Agents Costs
- Loan related Costs and interest
- Travel and Accommodation Costs limited to Property Acquisition
- Accounting Costs and Holding costs
- Negative Gearing
- Capital Gains Tax (CGT) Deduction
You must not forget to acquire expert advice on this topic as it can be tricky sometimes.
- Type Of Home:
Value of a property is also determined by the type of home you buy or build. The demand to supply ratio for each home in various suburbs can be different thereby changing the potential ad value of the property. Hence, make sure you know your desired area or suburb very well.
Hence, we say to understand your potential income and to make a wise investment decision you must step into the shoes of the tenant and see where your property can reach in upcoming years. Tenant behavioural demographics will also help in this.
By doing so, you will understand whether your desired suburb will root for student based housing or family friendly or tourist friendly or low-maintenance townhouses or luxurious villas. Everything comes with advantages and disadvantages so, based on your targeted demographics you can choose a property that can also meet your finance strategy and goals.
As investment property is purely a financial decision, hence make sure not to go wrong with the strong Finance planning part and involve as much expertise as you can.
Do not ever compromise on research. Jumping right into the investment after a month or two’s research will be like jumping off the highest cliff without any safety. Take your time in researching and involve experts after going through their previous works.
If you are stepping into property investment for the very first time, it can be overwhelming at times. Do not go procrastinating all over it at once. Take baby steps and plan your research, go step by step as the web is an ocean of information, many right ones and few wrong ones too. Step by Step process will allow you to go in depth and understand the concepts well. We believe there is a lot that an expert can sort out for you based on your needs and budget.
We hope you enjoyed reading this article and gained some knowledge as to what to keep in mind and how you can avoid wrong or inappropriate decisions. If you want to add something to this then you are most welcome to mention it in comments which can help other aspirants as well. Until next time, keep learning and researching and become a Smart Investor!