WHAT MAKES A GOOD INVESTMENT PROPERTY?

Investing in property has become something of a national past time in Australia, with many either already owning real estate, or looking to delve into the market.

A well chosen property is likely to deliver greater return in the future; not only in the form of capital growth but also in the form of rental returns.

The factors that influence the purchase of an investment property are much more identifiable than what makes a good home. Let’s look at some key considerations to help make a good investment property purchase.

Plan, prepare and research

Your success in real estate often comes down to your attention to detail when property investment planning. If you try to take shortcuts, skip over research or follow the advice of someone else without qualifying that information for yourself, you run the risk of making a costly mistake.

Professional support

Whether you’re building or buying an established property, have your finance and real estate team in place before you begin your serious searching. Line up a mortgage broker, real estate agent, tax advisor, lawyer, and so on early because the real estate investor with the best resources can identify the properties to ignore and those worthy of careful consideration. Move quickly — the speed at which you can close a transaction is an advantage in any type of market.

If possible, use equity from another property

Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage.

For example, if your home is currently worth $750,000, and you have $250,000 remaining to pay off on the mortgage, you have $500,000 worth of equity. Also, using the equity in your existing home can allow you to borrow more money against your investment property, which will increase your tax deductions.

Buy at the right stage of the property cycle

The property market moves in cycles. Property values may rise due to strong market growth, remain steady or even decline during certain phases of the cycle. Thus, as an investor it is important to know where the market is within the cycle to ensure you secure your property at the right price.

See the bigger picture and always take a long-term view of the investment. Property experts recommend a minimum of seven to ten years to see results. In saying that, make sure you manage your risks by working closely with your financial advisor and mortgage broker to ensure your time line and strategy is realistic.

Remember the longer you can afford to commit to a property the better and as you build up equity then you can consider purchasing another property. By structuring your loans correctly and being able to comfortably make mortgage payments you will find the right balance between financial stability and still being able to enjoy life.

Look for the prime locations

Location is integral to acquiring a good investment property. If the location is chosen correctly, the chance of gaining higher returns from your investment is far greater than if the location is not desirable and suitable for those looking to live close to amenities like schools, public transport, parks, etc. are easily accessible. Such properties have larger market value.

Most of the properties that have high value in terms of investment are located in large cities of Australia, particularly in cities such as Perth, Sydney, Brisbane and Melbourne.

Some of the best places to buy are those experiencing population growth. As population grows, infrastructure improves and the desirability of an area increases.

Areas where new development or redevelopment is heading are where you want to be. The best real estate investment properties are ones that are well located and physically sound but cosmetically challenged and poorly managed.

What type of property?

Residential property is an attractive investment and is easier to understand, purchase, and manage than most other types of property. Among residential property options, our top recommendations are small apartment buildings and single-family homes.

You need to own the right type of property; one that will be in continuous strong demand from both owner occupiers and tenants, because the former push up market prices, whilst the latter help to pay your mortgage.

The importance of finding good value for your investment dollar is owning real estate in up and coming areas with new development or renovated properties. This increases the chances of finding and keeping good tenants and leads to greater returns. Properties in great locations with extensive deferred maintenance, especially aesthetic issues that can be inexpensively addressed are another great opportunity.

Have professional support

Rental returns

The rental return you get from your investment properties should not only be at the premium end, you should also be able to increase it every year. And, while it is an important consideration when buying an investment property, it is not the most important consideration in a capital-growth strategy. The most important is growth — how much the value of the property will build over time compared with median prices. It is this rapidly growing asset that allows to you to build equity and buy more properties.

Generally speaking, the higher a property’s capital value, the lower the return in percentage terms. In a cash flow-positive strategy, the rule is that the rental return must cover the outgoings. That won’t happen in a capital-growth strategy. But setting rent is a balancing act. You want it high enough to offset your holding costs as much as possible, but low enough that you can attract and retain the right tenants. This is where investors who buy strictly based on positive cash flow can lose out: with tenants who either don’t treat the property well or are the kind who can’t shoulder regular rent increases.

Beware of taxes

If you’re a first time investor, you need to be aware of the financial implications of owning an investment property for the purpose of rental income.

If income from the renting of the property exceeds the outgoings such as interest and council rates the buyer could have to pay extra income tax.

Once purchased you must ensure you are claiming full tax deductions – including depreciation. If it is negatively geared it will reduce the income tax the purchaser pays Capital gains tax applies when the rental property is sold. It’s charged at your normal marginal tax rate on the profit made during ownership. However, if the investment is held for more than 12 months, the gain for tax purposes is halved.

Other taxes such as land tax in some states may also apply.

For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au