Tips for Investing in Property
When asked about good investments, my grandfather would always quote Mark Twain, “Buy land, they’re not making it anymore”.
There is no doubt an investment property can be a smart decision and a great way to assist in securing a strong financial future. But like any big decision, you need to factor in all the risks and expenses.
An investment property can provide an income stream through rental but choosing a good location right from the start can provide long-term value as well.
Australia has seen record low interest rates over the last decade and while no economist has a reliable crystal ball, the pattern of history suggests these rates will rise in the near future. This provides two factors to consider when buying an investment property:
- Firstly, with a rise in interest rates, your mortgage repayments will increase. This may have an impact on how much rent you charge, which in turn can have an impact of the affordability of your property for tenants.
- Secondly, should there be a sharp spike in interest rates, property will be less affordable for many people who will not be able to obtain mortgages. This will bring an increase to the rental market
There is risk and opportunity in this, so here are some of the other factors that you should consider before entering the investment property market.
Get the location right
When looking for an investment property, you need to take into consideration the location in terms of it being a desirable neighborhood. It should have easy access to to public transport or parking, shops & restaurants, schools and as has been important over the last two years recreation areas, such as parks and walking tracks. These factors play their part in determining market value of the property, as well as being key in how much it will increase in value. The area’s demographics also play an important part in deciding if the location is desirable to tenants.
You probably used the same considerations when looking for your own home, but when looking for a rental property, you also need to consider if the area has a strong rental market. This is determined by supply and demand. An area with low vacancy rates can indicate it is attractive to renters and suggest that a rental property will not stay vacant for long.
Another factor is the rental proportion of the area. While every area will have a mix of owner-occupiers and renters, a suburb in which there is a high rate of renters will mean a large number of landlords and higher competition for the rental market.
What’s the cost?
If you are thinking of investing in property, you will need to establish your current position. Do you have 20% for the deposit or do you plan to use equity in your home? Have less as a deposit may attract Lender’s Mortgage Insurance (LMI), which can add considerably to costs. You also need to be able to cover stamp duty and legal fees. In NSW, stamp duty on an investment property of $500,000 is around $18,000. This cost must be paid at the time of the purchase. While some people choose to add this cost to what they are borrowing, this means they will then pay interest on this extra amount added to the loan.
There are a number of regular costs in owning an investment property. These include council rates, water rates and land tax. There will also be ongoing maintenance costs, management fees & insurances. While all these provide tax benefits through negative gearing, you still need to be able to pay these bills as they come in.
Advantages
Another quote my grandfather regularly used was “landlord make money while they sleep” and there is truth in this. Once you have the property tenanted it is working for you and someone else is paying off your debt. As well, if you have used equity in your home then your outlay to increase and build wealth can be small.
A property appreciates over time, which not only increases the value of your asset base but can allow for annual rental increases. Making property a long-term investment can also have benefits in creating further equity, allowing you make further additions to your property portfolio.
Risks
There are very few totally risk-free investments and investing in property does come with potential issues. There is tenancy legislation which protects both landlord and tenant, but can make it difficult if there is a problem with a tenant. It is important to recognize that evicting a non-paying may take time and you need to be able to cover mortgage payments during this.
While your choice of property can mean minimal maintenance, there is likely to be regular upkeep of some kind required just through general wear-and-tear. Recent extreme weather conditions in Sydney have resulted in emergency situations for properties across a large number of suburbs.
It is key to have set aside an emergency fund which will offset months where the property is vacant due to low occupancy, emergency repairs/renovations, or other reasons.
Need help?
If all of this sounds daunting, know that there are always people to help you. A buyer’s advocate can point you towards properties that meet both your financial needs and are in locations that will provide growth. A mortgage broker will help you understand the financial commitment. A good property manager will take the stress out of being a landlord by providing reliable tenants, being first point of contact should issues arise and being expert in relevant legislation.
Amanda Banton Real estate has the people to help you get started with a property investment. At Amanda Banton Real Estate our number one priority is YOU. We know the importance of making sure the process is simple and successful.
