Investment-Property

10 Tips For Choosing An Investment Property

So, you’re thinking of buying your first residential investment property? There are a few things to consider before making a move. Here are our top 10 tips for avoiding potential difficulties and ensuring success.

1. Know Your Goal

Understanding your financial objectives is key to finding the right investment property. The actual property itself is rarely the end goal when it comes to investing – the financial elements should be your key focus. First, decide what your investment goal is and then create a plan to achieve it within a realistic time frame.

Are you looking for a retirement plan? An income-generator to fund your children’s education? Or building equity to gain a regular income? Define a strategy and review it regularly as your situation and the market changes.

2. Research, Research, Research

Understanding which property is going to work best for your situation is critical. It needs to be one that will be in high demand from renters and, possibly, owner-occupiers down the track. Be sure to research which types of properties are in order and rents quickly in particular areas and those that don’t. Is this an area popular with families who want three- or four-bedroom homes or with singles looking for studio apartments? Speak with property managers and check ads to determine what renters are currently looking for and how their needs may change in the future. What developments are planned nearby? Get to know the neighbourhood you’re planning to invest in.

3. Old Or New?

It’s the age-old debate: should you buy a renovator’s delight or something you can rent straight away? It’s great if it can be rented out as is, but the potential to renovate should also be considered. The ability to quickly and economically add value to a property is a plus, as it could increase rental returns. Don’t immediately write off a property just because it needs a paint job or the kitchen cabinets need replacing, but at the same time avoid overcapitalising if it’s not going to deliver returns. It’s a balancing act, so consider your skill levels, the extent of makeover required, and your access to funds to pay for renovations.

4. Location, Location, Location

Location is critical to performance. Some of the things to consider include:

  • How far is the property from the CBD or business areas?
  • Are there schools nearby?
  • How’s the shopping? Can tenants walk to local shops, or will they need to drive?
  • What and where are the public transport options?
  • What other amenities are close by? Are there cafes, a medical centre, a pharmacy, a gym?

5. Do Your Sums

Always check your finances before deciding to purchase a property. Get pre-approval and make sure you can cover repayments and extra upfront costs such as conveyancing, inspections and taxes. There are also ongoing costs to consider, including landlord insurance, strata and property management fees, property maintenance, council rates and utilities.

You need to set yourself a realistic picture of a property’s cash flow, rather than a vague idea of whether rent will cover expenses, so use a spreadsheet to calculate all foreseeable costs. If cash flow is negative, can you afford to maintain the property? What happens if it’s vacant for a couple of months? Do your sums carefully and always ensure you factor in a financial buffer to avoid mortgage stress.

6. Choose The Right Setup

When it comes to investing, it’s essential to understand how to set up the purchase to receive the most benefit. The entity should be tax-effective and protect any existing assets. You can purchase in your name, through your super or a trust, but always understand how the purchase will affect you and your family. Expert advice can assist in maximising your benefits.

7. Pick The Right Features

You want to appeal to the highest number of tenants, so look for properties that offer that little something extra, like a second bathroom or a lock-up garage. Also, look at properties that appeal to many segments. For example, a lift may appeal to both retirees and a young family, as both will be looking to avoid stairs. Just make sure the benefits outweigh any extra costs.

8. Check Your Emotions At The Door

Remember, you won’t be living in this home, so there doesn’t need to be an emotional connection to the house or the area. Your decision should always be about which property will give you the best return, not which one is most suited to your tastes and lifestyle.

9. Timing Is Key

It’s a great idea to keep on top of the market’s movements and dynamics. While there are investment opportunities available most of the time, some market conditions are more favourable. Do plenty of research and, if you don’t fully understand it, ask for help.

10. Get Expert Advice

Your broker can put you in touch with experts when it comes to real estate and investment. This means accountants, real estate agents, lawyers and valuers. These people are immersed in the industry and will be able to guide you in your decision-making.

Nine things Australian financial advisers wish you knew

There are some simple money mistakes Aussies are making, and it costs us – and some of Australia’s top finance experts would like us to stop burning holes in our wallets this way.

If they had a captive audience, what advice would they give?

Yahoo Finance asked some financial advisers about the one thing they wish Australians would (or wouldn’t) do with their money. Here’s what they said.

Spend less than you earn

(If you’re going to take anything away from this, this is the rule to remember: it was a sentiment shared by more than one financial adviser.)

Live on less than what you make, invest it wisely and live a long-time. It’s a formula that can’t work.

Spend less than you earn and borrow less than you can afford. That way, you will constantly be growing your money, not getting in over your head, not losing money on dead interest, and you get to keep your sleep at night factor.

Learn the ‘Rule of 72’

I wish everyone could know about ‘the rule of 72.’ Everybody loves the thought of doubling their money, and why wouldn’t we want to have twice as much of something we love?

Determining how long it would take to double your money if you didn’t add to it or draw any investment earnings (i.e. compound returns) comes down to dividing 72 by either your timeframe or rate of return.

For example, let’s say you wanted to double your money in 10 years. 72 divided by 10 equals 7.2, meaning you need an annual rate of return of 7.2 per cent. Alternatively, let’s say you have the opportunity to earn a rate of return of 6 per cent each year. 72 divided by 6 equals 12, meaning it would take 12 years to double your money.

This is a simple and easy way to determine what level of risk you might need to achieve your goals.

Buy property

Get into the property market as early as possible.

Buying property at a young age (whether it’s an owner-occupied or investment) has almost always resulted in my clients accumulating more wealth than peers who didn’t buy property 10-15 years down the track.

The key is to pick the correct type of property in the right areas, which is easier said than done. Using simple maths, if you borrow money at 4 per cent to buy an investment property and your total return on the property was 10 per cent (a combination of net rental plus capital growth), you’re growing your wealth by 6 per cent per year on that asset.

Delay your gratification

This is a recognition of how our basic human behaviour can impact our finances. Impulse purchases satisfying our wants rather than needs can be fun – but can also be very expensive.

A couple of tips to help regain control:

  • When shopping online, park your purchases in the shopping cart, then log out. If you go back to the site in a week or so, then you’ve had time to consider your decision correctly and either press ‘buy’ or clear out the cart. However, remember to ignore those pesky email reminders!
  • An oldie but a goodie – if you shop the old fashioned way and use a credit card, then try popping the card in a glass of water and putting it in the freezer. You can still access it, but it means you’ll have to wait until it thaws out!

Don’t forget to compound.

The power of compounding! People spend money on things today that don’t truly make them happy or align with their core value. Instant gratification can have a detrimental impact on their long term goals. Our clients crave that sense of freedom, the ability to make choices and a degree of flexibility; this requires a level of structure, discipline and consistency. Set realistic, specific and measurable goals and formulate a game plan to ensure success.

Diversify

Diversity is key. In nature, the most diverse ecosystem wins. So when looking to invest, everyone should know the whole menu out there, the different options, varieties, cuisines (such as bonds, interest rate swaps, mortgage-backed securitisation, equities, value, small-cap, emerging markets, indexing, diversification, etc.).

You can eat it all and enjoy the benefits only the big end of town end up investing in. Just be diverse in your portfolio.

Check out your superannuation.

Get engaged with your superannuation! This is a financial gift from your employer, which, if managed properly, can set you up for a spectacular retirement. So many clients have no idea where their super is or how it is invested. When they’re shown how their superannuation can grow over time, with the ‘magic of compound interest, most clients get super excited (pardon the pun!) and immediately become a lot more interested in their personal retirement savings nest egg.

And it is all straightforward. All you need to do is contact your financial adviser or go directly to your super fund and ask to speak to one of their advisers, and they will be able to guide you as to the best investment option for you. Most super funds will also consolidate all your funds into one fund for you (let them do the running around for you).

You would be amazed at the benefit of consolidating your super and investing it in the right investment type for you – typically based on your age, years to retirement and attitude towards investment risk. Getting this right can add hundreds of thousands to your retirement nest egg. No client has ever said to me they’re not interested in extra money at retirement.

Do something about it (from a place of love)

The best love letter you could write is the one that leaves your spouse with enough money to pay off the mortgage and provide living expenses for your family if you die. It’s called life insurance, and taking it out is an act of love (and responsibility).

Financial advice is not about products. It’s about owning your life. You can’t do that if your finances are out of control and you have no structure. It’s like expecting to look fabulous while you sit on the couch day after day eating ice cream. It just won’t happen.

And finally: Just talk about it

It’s SO hard to drill it down to one thing, but I would want to impart is that we need to start talking about money again. With each other, with our partners, with our kids so that we normalise it, and it stops being this big, icky, awful, uncomfortable thing but rather just another thing we talk about.

 

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