Investment Property 101

Owning property as an investment option when it comes to creating wealth provides some investors with a sense of tangibility and if you do your research and stay the course with your plan it can provide solid returns over time.

As with all investment propositions you need to do your numbers and consider the investment on commercial terms to ensure you make a non-emotional decision.

There have been a number of reports recently about the property markets bottoming. If you are a first home buyer or property investor you should look at the following when it comes to property as an investment asset.

What should you consider as a first home buyer?

Your home is not generally considered an investment asset as you do not normally make an income return from it. However your home can be a good long term savings plan and can provide a good tax benefit based on the capital gains tax laws.

With your home you do not have to pay capital gains tax on the sale which provides a good outcome down the track if you have made some good capital gains overtime and are looking to relocate or downsize.

Location, Location, Location – if I can say this in as non emotive a way as possible it is important to do your research and ensure that you understand the property market you are getting into.

You also need to check how much deposit you will need o purchase into the property

What should you consider before buying an investment property?

Know what the property is worth and how much you will be able to rent it for.

Be confident that you can afford the repayments for the investment property if the property is not tenanted for a long period of time.

Don’t necessarily go for the cheapest or most expensive dwelling; consider your Return on Investment (ROI). This can be calculated by taking your cost, both set up and regular and then working out the income return and finding out how much you need your property to grow by to provide you with a return.

Look for an area that is close to amenities (for example shopping centres, universities, schools, libraries, close to transport).

Consider a dwelling that offers flexibility (for example, are there two bathrooms for a two bedroom place or are there enough car spaces if the home is not close to transport).

Look at the development planned for the area that you are purchasing in (a suburb zoned for further development can provide future benefits such as the prospect of developing amenities. In the same respect, check that planned future development won’t hinder your ability to rent your property).

Do your research to find out if the property is structurally sound (although there will always be costs in owning an investment property avoid a property that will need maintenance on a regular basis).

Find a good property manager: if you don’t have time to do it yourself a good property manager will take away the stress of managing your own rental property.

My Advice

You have a choice to do it yourself or to have someone manage the process for you. Depending on the market and strategy you are considering you need to do your numbers.

If you are borrowing money to complete the transaction you should shop around for the best rate and make sure you understand your break-even point. This number for any leveraging strategy will provide you with a growth return that your investment will need to achieve for you to start making money.

Once you know this you can look and research the areas and find an area which has opportunity for growth.

As with all strategies, particularly one which may have a large outlay, do your research and understand the product you are getting into.

Shop around for the best interest rate and loan offering.

Finally remain commercial in your approach, even if it has the nicest kitchen and fixtures, just because you like it doesn’t mean your tenants will. Try to keep your emotions in check and once you have made the decision stay the course of your strategy.

Remember that a property investment like other products needs to fit in with your long term plans, so if you are looking at this option call Money Mechanics so we can help you with the numbers.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.  Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.