Tips on Purchasing Investment Property
Buying an investment property continues to be one of Australia’s favourite ways to invest. A good investment can help accumulate your equity in the future. But many people ask me how to choose a good investment property? Not every investment property can give the client good investment return, positive cash flow and anticipated capital gain. You need to keep in mind that managing your investment effectively will help ensure you reach your financial goals. Below is some of the points we need to remember when we start to search for investment property.
1) Choose the right property
Investing in real estate is usually all about capital growth, so choosing a property that is likely to increase in value is the most critical decision you will make. Ensuring that you have a steady rental income stream is also vital because this cash flow will make the holding of the asset more affordable and provide much needed income.
There are a variety of property types to choose – home units, houses and land, apartments.
There are many factors people need to take into consideration. House rental income would be lower than units but house has no strata cost. If you invest in unit, make sure that you obtain a strata report from the vendor and have a look at the normal strata expense or whether there is need to big repair on sinking funds. For land, the holding cost is very high because there is no rental income. If you add up the interest, council rate and calculate in annual basis, you need to question whether I can undertake the effects on my cash flow?
It is also important that your property suits the demographics of renters in the area. For example, if it is near a university units are more suitable for students who seek accommodation. A family home that is close to schools and on a quiet street will be more desirable than one on a busy road.
2) Do your calculation of your holding cost
Holding costs include the interest expense, strata fee, council rate and other maintenance cost. These holding costs need to be taken into consideration and you need to review whether my current financial ability is able to undertake the load or not.
There are other costs people need to be aware of, for example, land tax.
3) Understand the market where you are buying.
Consider what other properties are available in the area. Make sure you do your homework and consult professionals you can trust. For example, you need to observe the rental market of that suburb. If advertisement on that suburb stays for over one month, you need to be wary of possible oversupply of that market. Going to a source such as RP Data can give you information on average rents, property values and suburb reports. That information is very useful in judging whether the price you offer is reasonable or not. It lists the recent sold properties near your property which can be a good reference. It is also a good idea to find out what changes may be happening in the area. For example, a major construction next to your property could make it harder to rent out. A planned train station or other infrastructure can well change the population of a suburb and attracts more people coming to settle and therefore increase the demand for housing.
4) Choose the correct mortgage and use your existing equity to maximize the lending on the investment property
How to structure your new investment loan will make a big difference to your tax benefit.
Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. For details, you can consult your accountant for tax advice.
Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates tend to be cheaper, but selecting a fixed rate loan at the right time can help your cash flow and reduce the risk of rate increasing.
5) Check the age and condition of the property
Real estate agent or vendor would only present the best side of the property. It is therefore advisable to engage a professional building and pest inspector before you purchase (and then once a year) to conduct a thorough inspection of the property to find any potential problems. If you are buying a unit, check the body corporate’s reserve fund for future capital works. Make sure there are sufficient funds to take care of any issues identified in the building report. It is adviseable for you to review whether annual levies are appropriate. Before you exchange the contract, you need to make sure that the property conditional is liveable and no major leaks and no termite threat or no major building defects. These will not be disclosed by real estate agent and vendor. Paying a professional building and pest report will help you gain deeper understanding of the property. Some houses do not have air-conditioning but air-conditioning is desirable for tenants and you need to add that cost of new air-conditioning into your calculation.
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