All You Need to Know About Property Investment
Buying an investment property seems pretty straightforward. However, it is not as simple as it sounds. Unlike purchasing a home where you will live in, you want an investment property that will let you earn money. Typically, it is through renting it out. Therefore, some factors that you may consider when finding a home will not be applicable.
Investing in properties continues to be a smart and popular way to invest money in Australia. Not everyone though is skilled in ensuring the purchase will earn a steady flow of cash. Mistakes are expensive in this type of venture.
In this post, you will learn the dos and don’ts in property investment. This way, you can learn about what works and what to avoid when purchasing a property. Additionally, you will find the reasons why property investment is a good idea, as well as why it may not be the right choice for you. We will also cover the most common strategies in Australia when it comes to investing in properties.
What is an Investment Property?
Before you decide that you should invest in properties, you should first understand what it is. Also known as real estate investment or income property, investing in properties is when you purchase an asset intending to get a return out of that investment. As mentioned, the most typical way of earning through investment properties is through rental income.
Another is through reselling the property. It can be something fleeting or a long-term endeavour. For instance, you can buy a house, upgrade or fix some problems, and sell it as quickly as possible.
One thing to note about investment properties is that they should not be used as your primary residence. You can have a regular job while you own an investment property.
Works of art, land, collectibles, and other assets can be considered an investment property if they can give you regular earnings.
Nevertheless, we will be talking about houses and buildings which can come in different types:
- ResidentialInvestors in Australia would often turn to rental homes to supplement their existing income. They would purchase a residential property and look for tenants. Then, they can start collecting monthly payments once the tenants have signed an agreement with them. Residential homes can be anything from condominiums or apartments to single-family houses.
- CommercialA commercial space that generates income is another type of investment property. There is a common misconception that investment properties are only those residential structures that accept tenants. However, if you’re looking for a larger income, you can invest in commercial properties instead. The rules are much stricter, and you will need to factor in a bigger budget. Still, it can give you higher earnings at the end of the year. Those who invest in commercial properties will have to pay for costly improvements and maintenance. The good news is that bigger returns can offset these expenses. Commercial buildings can be any space, including retail stores, apartment buildings designed for offices, and other workspaces.
- Mixed-UseA mixed-use building is even more complicated than commercial spaces. However, they often command higher rental prices, making them ideal for those aiming to earn bigger cash. As the name implies, the mixed-use property is used for both residential and commercial purposes. An example of this type of investment is a building with a retail storefront on the first floor, while the upper part of the structure has residential units.
With the various types of properties you can invest in, it can become truly confusing and complicated. Anyone can become an investor, but it does not mean they can come out successful. It now brings us to the next section where you want to know whether or not property investment is an endeavour that may work for you.
Is Investing in Properties for You?
One of the best things about property investment is that it is tangible. You can see it right in front of you, which makes it a more fulfilling investment. At the same time, it is easy to manage something that you can touch and see. The problem with it is that the cost of buying and maintaining this property can be significant. Without proper research and understanding, you can end up losing your investment.
Nevertheless, if money is a problem somehow, you can turn to banks and financial groups that may be willing to lend you cash.
Here are more reasons why property investment is a great idea in Australia right now:
- Tax BenefitsMany expenses can be claimed if you have an investment property. Some costs you can claim include advertising for tenants, maintenance, and fees that you may have paid on your loan. They can be tax-deductible as long as you file your tax return properly. Rental properties are under strict guidelines, especially those that you can only claim for a specific period. It may be helpful to keep records of income and expenses, including purchase and sale.
- Long-Term ReturnsWhen correctly implemented, you can make a substantial income with your investment property. Rent can also become a source of steady cash if you do not plan to resell the property. Others would rent the property out first until they find the right buyer for the house. Positive gearing is a common goal here in which the income should be greater than the total expenses on the property.
- Equity AccessEquity refers to the current value of the property after deducting the amount you owe. For instance, if the property is worth $800,000, and you still owe $300,000 on your loan, your equity is $500,000. This equity lets you secure a loan so you can be granted with another investment. You can use it for renovations or even purchasing another property.
As with any investment, there are no
guarantees here. You should always invest wisely, basing your decisions on research and not on emotion. Home improvements can increase the value of the property, but some may not have any effect. Before you make a decision, you should consider whether or not it will impact the current property value, and if it is a worthwhile enhancement.
Dos and Don’ts
Buying an investment property should be approached with caution. To be successful, there are some things you need to do and some that you need to avoid.
- Have a clear goal.Investing in a property is quite beneficial, especially for those who want to supplement their income. However, you need to decide why you are investing in the first place. It should fit in with your current financial situation as well. For instance, if you already have debts, buying a property may not be a good idea. For one, many banks will turn you down, particularly if you owe a hefty sum of money.If you have set your eyes on property investment, however, you want to make sure that you can afford the loan repayments. Paying your loan should not affect your lifestyle. Therefore, you should live comfortably while accepting that there is a risk of not getting your investment back.
- Research on the market.With so many options in Australia right now, it is pertinent that you do your research first before buying an investment property. It will help you understand your options, such as a house or an apartment. You will also learn where the most suitable suburbs are for earning rental income.The Australian housing market has lukewarm for a while but has recently been picking up speed. According to estate statistics, house sales were a bit dismal for about two years. However, prices have lowered a bit, which sent many buyers into the market once again.
Melbourne, Darwin, Hobart, and Brisbane have higher prices now though since July 2019. Even though the prices have increased, many buyers are interested. It is indeed a great time to start investing in properties. The prudential settings, as well as lower interest rates in home loans, may have prompted potential homeowners to buy.
- Set a budget.
Before you even begin scouring through your options of properties to invest in, you should first determine your budget. Lenders will typically ask you to provide 10% to 20% of the deposit, which means that you should have cash ready. You also have to pay for stamp duty, fees for legal and conveyancing, insurance, and maintenance.
Apart from all these expenses, you should also find out how your loan could impact your investment as a whole. Australians have loans with variable interest rates, meaning the costs of their loan can differ depending on certain factors.
You should consider if these changing rates will negatively affect your investment. If possible, you should go for a loan with a fixed or split interest. This way, you can compute how much you need to provide for your borrowings and the property itself.
- Have a good credit history.Although you cannot fix bad credit history right away, you should know about your record before you purchase a property. This way, you can repair what requires attention. You can get the report for free through Equifax, Experian, and CheckYourCredit.com.au.The credit report contains your name and other personal details, along with your defaults, credit applications, and debt agreements among others.
- Set a timeframe.There is a time limit in property investment. However, you should start saving now and purchase a property as quickly as possible. Consider the current market and its condition. Have an effective plan for your investment goal but make sure it is doable. It also helps to have a flexible mindset since the market may not be always stable.
- Figure out who will manage your property.If you have enough time, you do not have to worry about who will manage the rental property. However, most investors have other jobs, so you may need someone who will take care of it for you. Hiring a property manager or even a real estate agent can be helpful. Of course, you need to understand that you will also have to pay for their services.
- Consider getting insurance.
Anything can happen once you have the property. From building damage to calamities to thievery, you can lose money if you are not covered. The best way to solve this problem is to get insurance. Think about the type of cover you need, along with the premiums you will pay for the policy you plan to take out.
- Have a budget for certain expenses.Owning an investment property involves ongoing expenses. You should be ready in case the need for repairs or renovations arises. It would help if you have funds for strata fees, council rates, water bills, landlords’ insurance, and vacancy costs among others.
- Leverage equity in your other properties.Use your home’s equity or perhaps another property investment if you have one. The equity will allow you to buy the new investment property. Equity, which is the amount of money you own off of that property.It is no secret that buying an investment property is expensive. Unless you have no problem paying for the total price of the house or apartment you intend to buy, you can use your existing home’s equity. You do not have to dip into your savings when you utilise this equity. You must understand how it works. Banks will not take risks, so they will not let you use all the equity you own. Typically, the usable equity is 80% of the total equity that you own.
- Take advantage of negative gearing while getting positive cash flow.Negative gearing denotes that you pay for the property every year. It is because the cost of the property is more than its income. Meanwhile, positive cash flow is when you earn money from the property every year, despite all the expenditures that you pay for.It makes sense that you know how much the property will cost you every week. Before buying, you should calculate its costs, along with the tax breaks and all the possible costs minus the total income.
Negative gearing is useful for many investors. It is one of the most popular methods that investors in Australia go for when they start investing. However, it takes dedication to top up funds to the property every month.
Each time you make a payment, the property will then move into positive cash flow. Therefore, you no longer have to add more funds.
- Buy a property because of the low home loan rates.When people borrow money to fund a property investment, one of the biggest deciding factors is the interest rate. It is not surprising that people quickly jump to the offer with the lowest interest.Unfortunately, it is not always as good as it seems. Most of these deals come with strings attached, including high ongoing costs, less flexibility, several fees you need to pay. Banks would even give attractive honeymoon rates, which have low rates at first. However, after the first year or two, the rates will begin to climb.
The solution here is to avoid the temptation of low-interest rates. Take a look at the offer as a whole, including its features, total costs, and requirements.
In 2008, the interest rate averaged 7.25% though the averaged variable rate was 9.35%. Ten years later, the official interest rate was only 1.5%, and the standard variable rate averaged just 5.25%.
- Use your emotions to make a decision.Most people would purchase a home based on their emotion. Only 10% of them choose based on logic. It may make sense for those who purchase a residential property. After all, it will be where they will live. When investing in a property, however, you should never involve your emotions as much as possible.Depend on analytical research and do not let what your heart tells you to cloud your judgement. You will only end up regretting the purchase. Most of the time, buyers would pay more than they should instead of negotiating to get the best price.
- You do not have a plan.Many beginners in property investment would simply buy the property they want without an actual plan. It is a mistake that even experienced investors can make. It is time to stop going in with no plan, no matter what type of investment you do. If you wish to succeed, you should prepare for the venture as if you will run a business. After all, the property is something that can give you earnings.Have an income goal and decide what type of property you want to manage. Ask yourself if it can help you achieve that specific goal you have in mind. Have a timeline as well as to when this goal should be reached. Make sure you can measure your progress towards your income goal and other objectives. It also helps to have the risks identified to come up with a plan to manage them.
- Pick a property at the most popular hotspots.You already know that many people would want to live in near famous places in Australia. However, the property prices in these areas are not attractive at all. They can easily spike upwards in a short period, which may be beneficial to you at first. However, these growth spurts do not last forever. They are mostly due to new industry or infrastructure in the area.
- Avoid professional advice.Many people do not want to hire a financial planner just because of the extra costs. They do not realise the huge savings they can get with just a sound financial recommendation. A tax accountant will help you make the right property investment decision as well. You can get your financing strategy in order with the help of other pros, such as a broker and adviser.With the huge money involved in property investment, it makes sense to have all the help you can get.
Common Strategies in Property Investment in Australia
If you are looking for ideas on how to earn from the property you wish to invest in, you may think that renting it out is the only possible source of income. Australians have become quite innovative over the years. You can choose which investment strategy will work best for your situation. Make sure that you base your decision on both the potential benefits and risk factors.
Here are the most common property investment strategies in the country:
- Home Ownership: The number of homeowners may have plummeted this year, but Australia still has one of the biggest proportions of residents with their own home. Investing in a home you own may not make sense at first. After all, it involves purchasing a house where you will live, make improvements, and ensure all problems are fixed. Over time, however, its value will increase. You will not generate any revenue in general, but you make money as its value goes up. It is a strategy where you climb up the property ladder with a lower-end home first until you get to your dream house.
- Buy and Hold: Another strategy is to purchase a house and invest in it for the long-term. Hold it and find tenants who will rent the space. You continue to look for a buyer and sell it when it reaches a higher value.
- Positive Cash Flow: Purchase a property first to generate income. This technique is often called passive income because you earn the rental income. This income is higher than the amount that you spend your money on to improve or fix the property, for instance.
- Renovate and Flip: One more strategy that Australians are now turning to is renovating a house and getting rid of it as quickly as possible. To make it work, you first need to look for a rundown property or one that is inexpensive because of the repairs required. In about three to nine months, you should have it ready and turn it over.
No matter which strategy you choose, it is important that you apply the dos and don’ts when buying an investment property. It will allow you to make a successful venture in the end.
If you feel you’re ready to get your foot on the property investment ladder, connect with Quantum Finance today.