Tips & Common Mistakes First-Time Investors Make
There are around 2 million people in Australia who are self-described landlords, and residential real estate accounts for more than half of all household wealth in the country. Property investment is a popular national activity in Australia.
"Did you know that the value of the Australian real estate market when considered as a category of assets exceeds $6.5 trillion? That is more than three times the total worth of all of the superannuation funds in the country, and it is more than four times the value of all of the stocks that are publicly traded in Australia " (Source: CoreLogic, 2016) ”
It is not hard to understand why. Real estate is an investment that is relatively easy to grasp in comparison to other types of investments, such as stocks, or more complex "instruments" such as derivatives. In addition to this, it is a physical object that may be observed, handled, and even inhabited. As long as there is consumer interest in purchasing real estate, there is a strong possibility that you will see a healthy return on your investment.
Compare this to the stock market, which is notorious for being more volatile and intricate than other markets. Investing in real estate surpasses a large number of other asset classes when measured against financial instruments such as these.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
That is not to suggest that investing in real estate is a walk in the park, though; plenty of inexperienced investors have been burned and had their hopes dashed. If you want to have any chance of being successful, you need to make sure that you finish all of your homework thoroughly; thus, think of this guide as your first assignment.
People from all walks of life who are simply trying to build a better life for themselves and their families can be considered first-time investors. They plan to purchase real estate and then lease it out in the expectation that one day, through prudent management and capital appreciation, they will be able to use the value in that property to assist them in maintaining their current standard of living into retirement without having to rely solely on assistance from the government.
Even if you do not currently own a home, you can still make financial investments in real estate. In point of fact, it might be an excellent method of accumulating equity, which is necessary for the purchase of a house in the future. This guide for first-time real estate investors will help demystify the property market, assisting you in making intelligent selections early on and assisting you in achieving excellent returns over time.
The real estate market in Australia is consistently ranked as one of the strongest in the world.
The political and economic stability that Australia enjoys, in addition to historically consistent capital growth and the tax benefits that come along with owning an investment property, all contribute to the fact that investing in real estate is a well-known avenue for financial planning and capital accumulation.
According to Dr Andrew Wilson, senior economist for the Domain Group, "We have a powerful culture of property investment in this country, and of course, one of the reasons for that is the robust and resilient nature of returns over the longer term and the fact that it is considered a positive risk asset by lenders." "We have a powerful culture of property investment in this country," says Dr. Andrew Wilson.
The return on your investment will be most significantly influenced by the selections you make regarding the price you pay and the type of real estate you select. These decisions should be well-researched. You should also think about your own budget, how well you can continue to manage your cash flow, and how much it will cost you to maintain the house.
1. Determine your structure
Determine the implications for taxation as a first step. There are tax advantages and disadvantages associated with using various structures, such as trusts, superannuation funds, businesses, or personal names. Before making a purchase, it is important to have sound structural advice from a qualified property accountant that is tailored to your specific needs. Changing your name at a later date might be an expensive endeavour.
2. Know your purpose
When some people invest, they do so with the goal of achieving financial stability and amassing wealth over the long term, while other investors are looking for a rapid return on their investment and an immediate profit.
Attempts at a rapid profit turnaround by inexperienced investors typically end in failure. They frequently make purchases without conducting sufficient study or drawing on sufficient prior expertise, only to discover that the costs are higher and the return is lower than projected, resulting in rapid losses rather than gains.
When you engage in activities of this nature, you run the risk of suffering severe, rapid, and extensive losses. A lot of people go into the business of flipping houses when the market is doing well, only to have their profits evaporate when the market swings against them. Caution, thorough investigation, and a low initial investment are all essential for short-term investors. Start small.
The pursuit of capital gains in the short term is more consistent with speculation than investing. A solid investment in real estate for the long run is exactly that: an investment.
3. Horses for courses
In spite of a significant portion of what you read and hear, the operation of no two properties is the same. The primary purpose of commercial property is to provide revenue, while the primary purpose of residential property is to generate capital growth.
It may be necessary to perform significant renovations on certain aspects of the property in order to increase its resale value, but other aspects may already have naturally high land values that do the job for you. Some real estate investments (like bed and breakfasts) need a significant amount of your time and active participation, but others can be managed by a third party, allowing you to "set it and forget it."
Because of all of these variables, the piece of real estate that is ideal for you could not be the ideal piece of real estate for someone else. Before you enter the market, it is important to think about your personal and financial situations and ambitions, as well as the stage of life you are currently in and the amount of participation you are willing to have.
4. Strategize first, buy later
Determine the kind of real estate that will work best for your needs given the circumstances. Do you have a working income that is substantial enough to sustain the costs of owning a property that is used for investment purposes? If that's the case, investing in residential real estate that has the potential to increase in value might be your best bet. Do you require supplemental money to make up for the loss of your wage or salary? In this scenario, investing in commercial real estate or a commercial real estate trust might be the better choice.
The next step is to establish who or what will end up owning it. Individual ownership, partnership ownership, corporation ownership, trust ownership, and self-managed superannuation fund ownership are the various options available. Because the ATO assesses the value of various types of real estate in different ways, it is important to consult a lawyer or an accountant before making a purchase. Should you find yourself in a position where you need to alter the form of ownership at a later date, you may be subject to thousands of dollars worth of additional stamp duty and/or capital gains tax.
5. Growth and return
Capital growth and rental income are two aspects that are frequently discussed in relation to property investments.
A common misconception about the growth of capital is that the price of real estate will double every seven years. As an illustration, the typical cost of a home in Brisbane in the year 1973 was $17,500. If the average price of a home had increased at the rate of doubling every seven years in 2014, it would have cost $1,120,000. In point of fact, it was somewhere around half of that amount.
The majority of so-called "property investing gurus" actually make they're living off of speaking engagements. If a deal appears to be too good to be true, then there is a good chance that it is. However, first-time property investors should be familiar with Margaret Lomas and Terry Ryder, who are both genuine property investment experts. Lomas is the author of 20 Must-Ask Questions for Every Property Investor, and Ryder is the proprietor of hotspotting.com.au. Both of these individuals are responsible for hotspotting.com.au.
When talking about income, the gross return is the number that is brought up most frequently. To arrive at this number, simply take the total amount of rent paid throughout the year and divide it by the selling price of the property. After that, the value that was obtained is multiplied by 100 so that we can receive a percentage.A return of 5.2% is achieved on an investment of $500,000 in real estate that generates a weekly income of $500 and is rented out. That comes out to $26,000, which when divided by $500,000 yields a percentage of 5.2 percent.
In 2018, interest rates were at all-time lows, and as a result, a return of 5.2% appeared to be rather appealing.
However, while you are conducting the calculation on the purchase of an investment, you should make sure that you underestimate the income and that you make sure that you overstate the expenses. That way, there won't be any unpleasant shocks along the way.
Instead of basing your purchase decision on the gross return, it is more prudent to compute the net profit, which takes into account all of your operating expenses. For instance, if you want to leave two weeks of the year open for vacancies, you will need to factor in the price of council rates, corporate body costs, agents' costs, maintenance, and insurance. A gross return of 5.2% swiftly falls to a return of less than 4% when it is calculated as an annualized rate. This does not necessarily indicate that it is a poor investment, but at least you will be basing your choice on a number that is more accurate going forward.
6. Get your finances in order
Due to the high entry and departure fees, purchasing real estate should always be viewed as a long-term investment opportunity. This is true regardless of the sort of property you decide to purchase. It is not enough to simply have the financial resources necessary to purchase the property; one must also be able to cover the costs of owning the property for a period of at least seven to ten years. Consider in advance any changes in your life that might occur in the future (for example, starting a family, going into business for yourself, or retiring), as these might impact your capacity to hold on to the asset for the long term.
It is important to keep in mind that the majority of the property's value will be lost to depreciation in the first five years after purchase if you plan to maximize your cash flow through the purchase of a new or nearly new property. After you've used all your allowance for depreciation, you can find yourself in a financial bind if you can't come up with another source of income to cover the costs of holding the property.
7. Make sure you don't underestimate the recurring expenses.
Make sure that you have enough money in your budget for the rent, the insurance, and the regular repairs. And once you have found the appropriate property for your investment portfolio, you should do all in your power to prevent expensive maintenance concerns from developing, such as replacing old taps.
8. Be aware of your limitations.
It is essential to have a complete comprehension of your cash flow situation prior to making any real estate investments. Also, before you begin your search for investment properties, speak with your financial institution about getting a pre-approval for the investment loan you intend to apply for. This will let you know the maximum amount you will be able to borrow.
You are not planning to make this purchase your primary residence; rather, it is an investment property. It is not necessary for you to adore it or even merely enjoy it. Put aside your feelings at the front door and make a decision that you will stick to based on the information you have gathered. If the price of the item goes above your limit, you should withdraw from the competition. It's one thing to make sensible purchases, but buying at any cost is still considered to be good financial strategy.
9. Do your own research
Be aware of those offering you free advise when you are conducting research on the local market. If someone is pretending to 'advise' you but getting paid by the seller to do so, then they will be answerable to the vendor and not to you.
Instead, conduct your own investigation by attending auctions in person, reviewing vital statistics obtained from impartial agencies, and monitoring auction results through The Age. In the event that you find yourself in need of assistance, you should seek the guidance of professionals who do not have a financial stake in directing you toward a specific course of action.
10. Invest in a prosperous region
It is best to look for a piece of investment real estate in a region that has a high demand for somewhere to live that can be rented out. Renters will be more interested in your property if you buy it in a location that is convenient to public transportation, educational institutions, and universities.
11. Don't buy based on what's popular.
Those who have never invested before should exercise extreme caution before buying into an economic trend. For instance, a large number of real estate investors moved into rural communities and areas during the mining boom that occurred in the 1990s and early 2000s. The end of the mining boom led to a considerable decline in residential investment activity in these regions, despite the fact that returns and growth were, quite simply, outstanding. There is no other word to describe these results. As a result, there were fewer people looking for rental properties, which resulted in lower rental returns. Additionally, buyers left the market, which caused prices to dramatically decrease.
Purchasing a piece of real estate may be an exciting and profitable investment, especially for first-time investors. Having a financial stake in a traditional asset, such as real estate, can provide a sense of security. Just keep in mind that investing in real estate, just like any other type of good investment, requires careful research, preparation, and strategy.
12. Ensure that your expectations for your investments are reasonable.
Do you anticipate a rapid increase in the property's value, or do you plan to keep it for the foreseeable future? Renovating older homes and selling them off at a profit during times of economic expansion is considerably simpler than in slower times. When the economy is more sluggish, it may take a considerable amount of time to achieve the same level of growth.
A property that is situated on a steep block may offer a breathtaking view, but the costs of retaining or excavating the land could make renovating it a nightmare.
13. Regular reviews
Once a year, give your property portfolio and your finance arrangements the kind of close inspection that will help you determine whether or not they are still adequate for the task at hand. Because the financial market is always shifting, it's possible that you could obtain a better bargain by switching to a different product, lender, or package. Are your properties producing higher than average rental income and/or capital growth in comparison to the market as a whole? If their rental and property values are below the median for Melbourne as a whole or for their neighbourhood, it may be time to consider selling their home.
When making your first investment, it's important to avoid making these common blunders.
Before making the plunge into the real estate market, prospective investors should first arm themselves with knowledge, perform a careful analysis of the numbers, and maintain a level head.
When making their first investment in real estate, many people make several serious errors, including the following:
• jump right in, before doing thorough due diligence
• make decisions based on emotions not facts
• borrow to their limit and don’t consider future changes in the lending market
• take too much risk; for example, they take out interest-only loans with no safety buffer
• choose the wrong location or asset
• rely on rental income to pay expenses
• don’t all the possible tax deductions
• don’t think about the long-term strategy.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
In Summary...
• No two properties are the same
• Buy a property to suit your circumstances and goals
• Decide on the form of ownership
• Make sure you can afford to hold the property long-term
• Be wary of free ‘advice.’
• Set a price limit and stick to it
• Review your financial arrangements and property portfolio annually.
Speak to a Melbourne property investment advisor today.