Property is considered one of the safest investments you can make to increase your asset base, and make your money work harder for you. However, this can also lead many investors into the trap of an unsuccessful property investment, because they do not put in the time, effort and preparation needed, thinking it is going to be easy and fail-safe.
To make property investment a success, there are a lot of important tips you need to heed and information and advice you need to understand in order to start your investment journey on the right foot, and make that journey a prosperous one, with the least amount of angst.
To start you on the road to successful property investment, here are five tips which will inform you of common investment pitfalls, and spur you onto building a successful investment portfolio.
1 – Choose a good value property
There is a popular real estate adage that ‘you make your money when you buy, not when you sell’ and this makes the first step of your investment journey one of the most important. When you choose a property which is good value now, and has potential for good growth later, you are well on your way to a successful investment.
The key to finding a value for money investment property is to not get attached, or emotional in your search. Don’t get caught up by the beautiful gardens and neglect to have an inspector check the structural soundness of the building. You’ll also need to make sure you choose an average property, with a wide appeal. You don’t one which is too modern, or one which is too classic for example, instead make sure the property will appeal to the widest demographic possible, because a good value property is of minimal use to you if you can’t rent it out.
When considering your tenants, look at a property where you can charge a rental price which is as close as possible to the costs and repayments to maintain the property. This is another way to ensure value, because you don’t have to overextend your own finances. Of course, make sure you know the property isn’t overvalued due to high demand because of the market or the suburb. With a high asking price, higher than the true value of the property, you leave little room for capital growth for some time.
If you are looking for value at tax time too, look for a newer property, ideally brand new, as there is more opportunity to claim for more depreciation, and there are likely to be fewer maintenance issues. A new property with reliable wiring and a brand new solid structure is also more appealing to tenants.
2 – Keep your investment records separate
There is no denying that the fees and charges to purchase a home, and even an investment home, can be substantial and they don’t stop at the loan application, stamp duty or inspection fees. A property can eat up your funds through maintenance, loan repayments and council rates and other bills, and it is important that these expenses don’t eat into your investment returns.
Instead, make sure to keep detailed records of everything you spend on your investment, and keep that spending separate from your personal accounts at all times. You don’t want to jeopardize your ability to claim expenses because you have muddied the water with your personal finances.
It is important to record everything because you can claim everything – all costs to do with purchasing and maintaining your investment property, plus the depreciation of the asset and fixtures.
3 – Have a clear strategy
Knowing what you want from your investment and when you want it will help you with your choice of investment property. Therefore, decide if you are investing for:
- Capital growth. This means you’re in this investment for the long haul and want to find an affordable property in an area with huge growth potential so that down the track you can sell your investment, or use the equity to move onto bigger and better things.
- Rental income. It is possible to find investment properties where the rent covers and exceeds the expenses of the loan and maintenance and rental income can supplement your own income, or fund your retirement. In this instance you need an affordable property and a small loan and units and apartments are the most likely to yield a rental income.
- Renovate and sell. If you’re planning to flip your investment property you’re looking for a home which has seen better days, needs some superficial work done, and has been able to convince the other buyers that it’s too much hard work. In this instance you can pick up a run down property for a great price, spend a little prettying it up and sell it for a profit and get your money back quite quickly.
4 – Can you afford your investment now?
If you’re in the property investment market for capital growth and tax deduction benefits then you know you’re in for a long term investment, and plan on significant gains later on. However, the mortgage on your investment property has to be paid now, every month, before you can make any gains.
Therefore, look at your budget and make sure you can cover the mortgage repayments on your own home, and that you can keep a healthy balance in your personal emergency account. Then look at how you can cover the rental mortgage and expenses with what’s left over, also accounting for a rental emergency account because you will need to fix any issues right away to keep your tenants happy.
5 – Know your loan options
Choosing the right investment loan can help you better manage your property and expenses, and help make your investment venture a success. For example, you can choose an investment loan which is:
- Interest only. This means you are paying back only the interest which has accumulated over the month, and none of the principal amount. You are not getting any closer to owning the property, but in investments, that is often not the goal anyway. Instead, you’re enjoying lower monthly repayments and making it easier to make your tax claims, because you can claim the entire amount of your repayment.
- Linked to an offset account. The funds in an offset account reduce the amount of interest payable on a loan by offsetting against the principal loan amount. Not only will an offset account reduce your interest charges and mortgage repayments, it will also give you a dedicated account in which you can keep your emergency investment funds handy, and separate from your personal finances.
- A line of credit loan. A line of credit loan does not have a set term, and instead is a revolving approved credit amount which is available to you when you need it. This means you can draw down on your investment loan line of credit for emergency expenses, and you can even draw down to cover your repayments until you reach your limit.