Like all investments it pays to do your homework before you take the plunge into property. But even with rising interest rates, a sound strategy can pay off. The shortage of rental properties, combined with rising prices in most markets, means that if you choose the right property and make sure you keep a close eye on your investment, you could reap the rewards.
Here are some tips to help you make the most of your investment.
Take a long-term view and realise that investing in property is usually a long-term strategy
The housing market is generally a 7-10 year cycle; there are always highs, lows and steady patches. Make sure you’re comfortable with how much you’re borrowing, and you know what your financial goals are. Plan ahead – you may find a long-term tenant or you may find that your tenants come and go. Make sure your cashflow is sufficient so that you can cover the mortgage and other outgoings while the property is empty.
Positive vs. negative gearing
Keep in mind that the interest and related expenses you incur (such as repairs and maintenance) are tax deductible. Negative gearing means your loan repayments, fees and other costs exceed your rental income. This means that the net loss can be offset against other income you earn, so you will be able to reduce the amount of tax payable on your other income.
Positive gearing, on the other hand, is where the annual rental income received from the property is higher than the annual loan repayments and costs. The benefit here is that you earn extra income, but of course this is taxable. Also make sure you factor in the capital gains tax you will have to pay if you decide to sell the property. Be sure to consult your taxation advisor.
Take control of your investment by being properly informed on property values, trends and what is happening in the home loan market.
To research the areas you are interested in, read property-related articles, use reputable property research companies and the Real Estate Institute of Australia, search the Internet, plus talk to people in the know. Find out each area’s average rental yields, what services infrastructure is in place and planned, and the property price growth that has been experienced and is expected. Invest the time to fully understand the market – it could make a big difference to future investment returns.
Consider using the equity in any other property you own.
Tapping into your home equity, or equity from another property investment, is a great launching platform for buying an investment property. Say your home is valued at $400,000, you owe $150,000 on your mortgage and you want to invest 10% of the equity (or $25,000) into another property. You can do so provided that you can comfortably afford your repayments.
Think about buying with friends, family or work colleagues.
You can pool your resources with friends or family to help you get into the market. As long as together you can pay off the loan, it doesn’t matter if one party earns more, or has greater liabilities, than the other(s). The only difference is at the end of the loan term the property might not be owned in equal parts. An initial visit to a solicitor who specialises in property should result in a contract that outlines who pays what and how much of the property each applicant will own after paying off the mortgage.
Choose a loan tailored to your current needs.
There are many different home loan options to suit you. Will you go with an interest only or a principal and interest loan? Fixed or variable rate? Which features are needed? Will you provide a deposit or choose a 100% or even a 110% loan? Apply for a loan that suits your current needs and lifestyle because you can always refinance later. With new products entering the increasingly competitive mortgage market, and reputable mortgage brokers providing free Home Loan Health Checks you can always change your loan situation further down the track if it’s advantageous to do so.
Use a reputable agent
Seek advice about the type of investment property that will maximise your investment. For example, if your repayments are at an interest rate of 8% then you would need a property to secure you, as an average over the entire loan term, an annual return on investment (ROI) that is higher than the costs i.e. if net rent is 4% and the interest rate is 8% then it only needs to grow at more than 4% to be a sound investment. Reputable local real estate agents know the market better than most and are a valuable resource to use prior to purchase.
Visit a financial adviser and/or accountant
You also need to discuss your full monetary situation with someone with experience in advising on diversified investments. That’s because you need to make sure that your financial situation is improved by an investment property and that you can afford repayments without stretching the budget uncomfortably. Remember, you must make this investment work for you and your long-term strategy.
Seek out an excellent property manager
Buying an investment property is only the first step towards personal wealth creation. You can ensure long term peace of mind by taking the time to find an excellent property manager. There are many agents that advertise property management services but, as a rule, there are generally only one or two excellent property managers in every suburb. And when you are considering trusting someone with such a large asset you should accept no less than an excellent property manager.
Look for the number of "For Lease" signs and "Leased" signs displayed by agents in the same area as your rental property. Check out property websites and talk to locals - it won't talke long to discover an excellent local property manager.
Much of this article is courtesy of Mortgage Choice (mortgagechoice.com.au)