The reasons to own an investment property are many, you might want an income producing asset for retirement, you might wish to rent where you live and own a property elsewhere, or property might be your chosen path for wealth-creation. For whatever reason drives you to want to invest in property, there are a few things you should take into consideration.
Property Investing needs Planning
1. Target: be clear about what you want to achieve, and in what time-frames. Before you buy an investment property you should decide on your earning targets: will this be a negatively or positively geared investment? Will you invest in renovations to increase your rental return? Get your mortgage broker to arrange for a pre-approval of your investment loan, so you know how much you’re able to borrow before you start hunting for properties.
2. Don’t underestimate: write detailed plans about what you have to spend, how much you will have to borrow, and what the borrowings will cost. Before investing in property it’s vital to have a thorough understanding of your cash flow. Make sure you budget enough for renovating, repairs and maintenance as well as the estimated costs of management, insurance and rates, then calculate the rental income. And when you have purchased your ideal investment property do what you can to prevent costly maintenance issues arising, such as replace ageing taps.
3. Leg work: burn some shoe leather before you buy a property. Go to real estate agencies in the area and pick up their ‘for rent’ sheets. See what rents are being asked for what kind of properties. Ask agents what properties they would like to manage. Go to some open days. Get a sense of which agents are up to scratch.
4. Research fully: it’s important you do your research before you commit, like with any other investment. Investigate the area you’re considering buying in, and whether there are a good range of amenities nearby like schools and shopping centres. You should also get professional advice on property values, recent sales and the growth outlook for the area.
Engage Investment Property Professionals
5. Get the right loan advice: loans for an investment property are different to regular home loans in terms of the options you have and the application criteria. For instance, you may be able to make interest-only repayments for some of the loan term, and get the rental income the property generates taken into account for the potential to borrow more. Get your mortgage broker to provide quotes from at least 3 different lenders.
6. Fixed or variable: crunch the numbers for both a fixed rate mortgage and a variable rate mortgage. Fixed rates are at historical lows, and give you interest rate certainty for two, three or five years. But variable rates provide you with flexibility. You can always get the best of both worlds by applying for a split rate mortgage, a combination loan of both fixed and variable interest rates.
7. Accountant: don’t rely on backyard BBQ chit-chat for that all-important tax advice. If negative gearing your rental property is your intention, with the aim of claiming the loss you make against your taxable income, then you should be advised by an accountant.
8. Depreciation: a depreciation schedule prepared by a specialist Quantity Surveying firm helps to ensure that you are maximising the cash return from your investment property.
Protect your Investment
9. Property inspections: if you’re buying a place to rent to others, basic things must be in working order that you might let slide if you lived there yourself. Always have a full property inspection done by a qualified expert.
10. Protection: landlord insurance is essential and you should contact a broker if you are unsure about what is included or excluded in the policy. Renting property is a business and some of the features of landlord insurance may not be familiar. Getting this wrong is not an option.
11. Find a quality property manager – Renting out your investment property as soon as possible once you’ve purchased it, will maximise the return you get with rental income and also assist you to pay your mortgage. Doing this through a property manager will be at a cost, but it is the easiest way to go, as they will market the property, reference check tenants for you, and advise you on appropriate rental prices for your area.
An investment property is an excellent way to build wealth, but it should be approached like a business. Have a target, formulate a plan, never underestimate the costs and work closely with your mortgage broker and accountant.