Investing in property is a long held Australian dream – it’s as if it’s entrenched into our DNA. We know investors choose property because it’s generally less volatile than the share market, it’s tangible, there are tax incentives and you can earn income from tenants. What’s interesting though is that while many Australians invest in property, few do so with a plan and/or expert advice. We’ve compiled a list of the steps you should consider prior to your next investment purchase.
1. Prepare for the pitfalls
Knowing the pitfalls of being a property investor is critical to your investing success. Some of these include the high entry and exit costs, extended vacancy periods in difficult markets, increased interest rates, unexpected maintenance costs and changes in tenant’s circumstances – to name a few. Of course, if planned for, all of these challenges can be overcome and surrounding yourself with the right people will make any unforeseen challenge much easier to deal with.
2. Identify your investment profile
It’s true that many investors ‘fall’ into property investing. That is, they may have been gifted a property via a will, or they might move from their own home and turn it into an investment property. A good financial planner and Agent will not only seek to understand your needs, they’ll match your needs with your investing profile. For example, choosing a property with high maintenance needs when you want to buy and forget, will no doubt make the investment less enjoyable. Similarly, knowing if you’re investing for capital growth or yield will determine the type of property that suits your needs best.
3. Look for location
Once you know the type of property and the type of tenants you’re after, research where property prices are predicted to grow by proven economists. Look for areas with low vacancy rates, low unemployment and potentially an undersupply of property and oversupply of tenants (just visit a couple of open homes on the weekend). If you are opting for a new property in a relatively new area, understand that it may take years for the rents to stabilise as every time new builds are released, the rental price may fall.
4. Consider your market
What do good tenants pay for? Most good tenants want secure neighbourhoods, access to public transport, shops, café precincts, beaches, parks and onsite parking. But if your investing profile suits a low maintenance unit – then you might need to think about what professional couples really want – views, easy lifestyle, entertaining space and access to the CBD. Maybe you’re after a house? Then consider what families really need & want – good street appeal, space for the kids and extended family, fencing for pets and access to a good local school.
5. Calculate the costs
There are costs that are obvious and costs and benefits that are less so. Partnering with the right accountant will really make a difference. Take into consideration the following: strata fees, council rates, insurance, legal fees, mortgage repayments, renovation and maintenance repairs, management fees, conveyancing fees, building inspection etc. And understand the benefits – tax deprecation, negative gearing, capital growth etc.
6. Set the strategy
Are you purchasing to renovate and ‘flip’ or are you in it for the long haul? Always start with the end in mind by developing a well thought-out exit plan. These days many investors are pooling their funds. This is a great way to share the risk and the high entry costs, but if you don’t have an exit strategy and someone’s circumstances change, then things can get messy quickly.
7. Manage your risk
When you’ve found the right property, ensure all the legals are taken care of and don’t cut corners. Order a valuation and make sure a building & pest inspection is completed. Also think about minimising vacancy periods by including a clause that says you can begin seeking tenants once the property goes unconditional and the property will be professionally cleaned. This can save you a couple of weeks rent.
8. Find the perfect property manager
Finding a great property manager can be like finding a great childcare worker and as much effort needs to be taken. Your property manager should be stable in their role, have at least 2 years’ experience, know the legislation (query them!) and should ask you why you’re investing and how this investment fits in with your plans. They should also ask how you’d like communication and provide a written guarantee. Set all the parameters up early – inspections, rent increases, type of tenants etc.
9. Review your strategy
Your plan wasn’t created to be popped in the bottom drawer and never to be seen again. Setting time aside to know whether your property is performing in line with your expectations and initial plan, is important. After all, a property that isn’t performing to your expectations is unlikely to be enjoyable. Review your property with your Property Manager and financial planner at least annually to track its success.
10. Keep an eye out for opportunities
If you have the right people surrounding you, you should see opportunities to increase your portfolio and ultimately your wealth.