When it comes to investing, Australians typically prefer to invest in property rather than to invest in shares due to property generally being less volatile and being a physical object that can be seen and touched.
The main goal of owning an investment property is to ultimately make a profit at the end of the day which can be used to help secure your financial future and allow you to live a comfortable life at retirement.
However, like all types of investments you should be aware that there is an element of risk and not all property investments deliver a positive return so it is important to look at the facts and focus on logic rather than let your emotions take over.
To help you on your path we have listed seven questions below that any smart investor should think seriously about before building their property portfolio.
1. What are my goals?
What is your main reason or reasons to wanting to invest in property? Is it to make money and create long-term wealth for your future? Maybe you want to be financially secure and comfortable by the time you retire?
Whatever the reason, it is important not to get emotionally attached to the property as it is just a vehicle to get you to your goals. In order to do this though you must be clear of what your goals are, so first write this down and decide on a realistic time frame that you want to achieve this by. By making a plan and sticking to it you are less likely to get distracted.
2. What type of property should I go for?
The type of property that you choose to buy is a key factor, but there are also many things to think about. You first need to decide whether you want to buy an established property or a new or off the plan property. There are advantages to both, but buying off the plan allows you to take advantage of higher depreciation and tax savings as well as being able to receive stamp duty savings and a first home buyer grant if you are eligible.
You then need to ensure that the property you choose has strong capital growth and will increase in value over time, which is largely dependent on the location. It should also continue to receive strong demand from owner occupiers as well as rental tenants, so it is important that the property suits the demographics in the area.
3. Where should I buy?
It is vitally important that you understand the market of the area you are planning on buying. You can do this through a number of ways:
- Speak to locals and real estate agents about a similar property to the one you are interested in to get the inside information.
- Look at what similar properties are available within the immediate area.
- Use independent sources such as RP Data to give useful information such as average rents, property values, suburb reports and demographics.
- Find out if there are any changes happening within the area which may affect the value of your property. (For example, more residential developments being built in the next few years could make it more difficult to find a tenant, whilst a new train station within easy reach could help increase the value more quickly).
- Consider suburbs that are going through gentrification, as these tend to outperform others.
- Look at what is close by. Are there local amenities, transport options, schools, parks nearby? This will make your property more appealing for a tenant if amenities are easily accessible.
4. When is the right time to buy?
Typically when the market has reached its peak within the property cycle you should avoid buying at this time as prices have risen at a rapid rate and this is when sellers try to sell their properties. The best time to buy is in the rising market and upswing periods as this is when properties are more affordable.
However, you should keep in mind that property values generally double in value every 8 – 10 years or so, so if bought in the correct growth area you should see the values rise in time.
5. What can I afford and what is my cash flow?
As buying an investment property is a medium to long term investment it is important to work out your cash flow so you know what you can actually afford to buy and to ensure you can afford to meet the mortgage repayments. You should determine your current cash flow situation and make a budget plan, which includes some surplus funds for any emergency repairs or a rainy day.
You should also make yourself aware of all the costs involved with buying a property which includes stamp duty, property management fees, strata rates, insurance etc.
6. Who should I include in my team of experts?
As well as finding the right real estate agent to use, you should also consider finding a qualified accountant, a solicitor, an independent mortgage broker as well as a property manager if you don’t want to take on the responsibility of looking after the property and finding suitable tenants.
Although your family and friends may think they know what is best for you, you should try to ignore their advice (unless they are a smart investor and have a solid understanding of the market you are looking at). You should base your decision on the facts and figures that you see in front of you.
7. Look at the longer term
As mentioned earlier, property is a longer term investment and you should be prepared that prices may not rise immediately. We generally say that you should hold on to a property for at least ten years in order to see property values rise allowing you to build up equity.
If your property has done well and grown in value, you should have enough equity to consider expanding your property portfolio and purchase a second investment property. However, it is important not to stretch yourself to the limit as unlike shares, you can’t sell your property quickly if you urgently need money.
Published on 19th of November 2014 by Marty Stanowich