Thinking of buying an investment property? RateCity Money Editor Sally Tindall shares her tips on what to consider before you go ahead.
Property investment is a popular money-making venture in Australia, and it’s easy to see why.
Firstly, it’s a lot easier to understand than the share market (well, at least for me it is). Secondly, while it’s not completely shock-proof, if you do your research, and start with something that’s well within your means, it can be less volatile than shares.
A shortage of stock in Sydney has seen prices there skyrocket in recent years, attracting more and more investors to the market. That being said, a property is a huge investment, and its one you don’t want to make until you’re 110 per cent ready.
Don’t let a frenetic marketplace make you think you have to rush in. If you don’t quite have the deposit, save the Saturday morning house hunting missions for later down the track. The good thing about houses is that they aren’t going anywhere.
Make sure you can afford it
Many investment properties are negatively geared, which sounds like a neat little tax trick until you realise that what it really means is that you have to fork out money each month.
If your property is negatively geared, it means that the rental income doesn’t cover all the expenses that you pay as the owner including interest repayments, property management fees, council and water rates. There’s also a stack of fees to pay at the time of purchase as well as stamp duty, legal fees and building reports.
Then you have to think about repairs. Remember that eighties movie the Money Pit? That’s the perfect description of my property investment (without the bad hair). The balcony needed replacing, the possums had to be evicted, the front door fell off – the list went on.
While the long-term capital growth of a property can make it a wise investment in the end, the chances are you’ll be financially stressed and stretched in the first year.
The best way to mitigate this is to sit down and crunch the numbers. Work out how much rent you are likely to receive and then start subtracting all the known costs. When you arrive at this figure add in an emergency buffer of at least 10 per cent if not more. It may seem excessive but you really want to make sure you have enough spare cash.
Be prepared for rental set backs
People move – it’s a fact of life, but when it’s out of your place and you can’t find a new tenant in time, it’s actually more like a bad dream.
At times like these that cash flow becomes incredibly important again. Often new tenants can’t move in for a few weeks, and if your property is being managed by an agent, you’ll have to pay for advertising and letting fees. To be completely prudent, you need access to enough cash to cover the interest repayments for at least a month but often it’s more likely to be two.
Interest rates will rise
This is not a prediction. It’s a matter of historical fact – rates will not be at historic lows for the next thirty years. When calculating the repayments on an investment, consider what you would have to pay at the historical average interest rate of seven per cent and make sure that this sits well with you.
Do your homework
Don’t assume that any property in any location will increase in price or provide strong rental returns. Do your research and go into it with an open mind. Remember – you are looking for something that rents well, not for something that you personally like.
Michael Yardney, CEO of Metropole Property Strategists says buyers need to be aware that there are areas where they can lose money. “For example at Docklands in Melbourne, property prices have probably not increased in value at all in 10 years because of an oversupply.”
Yardney’s ‘five string’ approach to finding a good investment is worth thinking over. The five strings are:
• Buy a property that has wide owner occupier appeal.
• Buy a property ’below its intrinsic value’ – that is, avoid paying a premium for new or off the plan properties.
• Buy in an area that has a history of strong capital growth and one that will continue to because of the area’s demographics.
• Look for a ‘property with a twist ‘– something that will set it apart.
• Consider a property you can refurbish or redevelop to add value.
Be in it for the long haul
The best way to reap the rewards is to adopt a long-term strategy and take into consideration aspects such as an adequate deposit and maintenance costs.
According to Yardney, in every 10-year cycle there will be a couple of years of exceptional price growth and an equivalent period of price drops or stagnation. To come out on top, you should be prepared to hang onto your investment property for 10 years or more.
Jason Thomson | Mortgage Adviser and Finance Broker | Smartline Cairns