Guru Guide: Investment property rules to live by
Guru Guide: Investment property rules to live by
23 Jan, 2020
The traditional form of investment: for generations buying an investment property has been a tried-and-true method of building wealth, as well as increasing assets. Though fads – such as bitcoin – might come and go, property investment will seemingly be on everybody’s radar.
We all know the story:
“My [insert family member] used to have a house in [insert booming inner-city region]. Back then it was worth $35,000. Now, it’s boosted to over a million.“
No wonder property investment is so popular. Not only does it allow you to see and feel your investment, but you can also live in it – all while it builds in value.
However, before jumping in headfirst, it’s important to understand the ins and outs. As the name might suggest, buying property is indeed an investment – and a huge one at that – so you’ll want to give yourself the best chance of doing it right. That’s where this guide comes in.
Note: First home buyers check out our top tips for your first home loan journey.
What should I consider before buying an investment property?
When investing, there are a multitude of factors to consider, including (but not limited to):
- Leverage: How much rent or borrowing power can you ‘leverage’ from the property? Have you got an existing property to use as equity?
- Market Performance: Is it a strong performer? What are market conditions like?
- Preference: Unlike shares, property is an investment you can see, feel and live in; is this important to you?
- Personal Budget: To invest in property, you must be willing to save.
- Timing: Learn and play the market; timing can be everything.
- Location: When there’s a problem with oversupply, location will make or break your dreams.
Check out our top 6 tips for first home buyers
The importance of leverage
Leverage is about looking at how much rent or borrowing power you’ll be able to gain from the property – as well as considering any leverage you might already have (such as equity from a current property).
Buying an investment property does not necessarily mean you need a lot of cash upfront. Often, once you have bought your first property you are able to use the equity to secure more property loans; contributing to a bigger portfolio.
If you’re planning on renting the property, remember to check the property’s rental yield, and consider whether you’re looking for a short or long-term gain.
For example, an apartment might have a higher rental yield than a more expensive house in the same suburb but, over a long period of time the value-increase of the house might be greater (equating to more equity).
In contrast, the apartment could offer a greater short-term reward which you will be able to funnel into other investments, or use to pay off your loan.
Check market performance
Consider the market to see whether shares or property investment is worth your time. Generally, shares are better for the short-to-medium-term investments and property is better for the long-term. Remember, financial advisors can be a sound source of advice when weighing up the decision.
Read more on whether Is it worth seeing a financial advisor?
Do you have a preference for tangible assets?
Is having a tangible asset something you put a lot of importance on? Are you looking for a long-term investment that can put a roof over your family’s head? For these reasons, property investment is often the right choice.
How’s your budget looking?
Before jumping into property investment, ensure you are committed to your personal budget. Although following a spreadsheet that tells you to cancel your Netflix subscription and stop buying takeaway coffees mightn’t sound like much fun, if you’re truly committed to the investment it’s do-able. At the same time, be wary of setting too-strict of a budget that realistically, you won’t be able to follow.
Timing’s a peach
As time goes on, conditions of the property market change. At the same time, investors must consider whether they are looking at a property for the short or long-term.
Before jumping in, do your research! Absorb market stats and learn what they’re doing, and why. What makes conditions favourable? What is making them worse? How are interest rates affecting the market?
When in doubt, seeking financial advice from a qualified financial advisor is never a bad idea.
“Location, location, location!”
There’s a reason this is such a common saying.
Location can be this standout feature. Things to look for:
- Schools: Children are always being born, so proximity to schools will always be important. How many primary and secondary schools are in the area? How do they rate? Are they walking distance?
- Centrality: How close is the property to commuter hubs? Are there grocery stores nearby? Land is a fixed commodity, meaning that once it’s gone, you can’t just ‘create’ more.
- Planned development: Before buying, check out what is happening in the area. For example, Western Sydney is currently in the midst of building a new airport, leading many to believe the area around Badgerys Creek – a spot between Penrith, Campbelltown and Liverpool – to be a sound investment opportunity.
- Physical house location: When times are down, a property on the main road mightn’t prove as popular as a house a couple of streets back in a quiet cul-de-sac. Consider the property’s worth in an oversaturated market: does it have something the other houses in the suburb don’t have?
It’s also important to think about land size. Houses get knocked-down and rebuilt all the time, and renovations are common. So, if you’re choosing between an old house on a big block compared to a new house on a small block, be sure to give the older property due consideration.
Related: Which Australian suburbs have experienced the highest price growth?
- Transport: Is there a nearby bus service? Train? Tram? Or maybe there’s not, but there’s a service planned for a few years’ time. As we become less reliant on cars – especially in metropolitan regions – transport corridors will become more and more important.
- The neighbourhood: Websites such as microburbs.com can be used to look at neighbourhood features, such as its demographics, nearby shops and cafes and ‘leafiness’ – it even gives a ‘hip’ score. Best of all, it takes its data from the Census, so you know it’s accurate.
- Strata or Torrens: A property with a ‘Torrens’ land title means that you own the property and the land. Most residential properties fall under this category. In contrast, a ‘strata’ title means that the property is part of a group – such as a group of units – where the owners are all responsible for the upkeep of the common areas, and a levy is usually payable.
Before committing to a strata-titled property, it’s important to assess the financial health of the owner’s corporation. How are the funds managed and who is responsible? In some cases, the unit with the ‘best view’ will be made to pay the most fees, so it’s important to check before making the investment.
Words by Kathryn Lee
Related: What are the costs involved in buying a home? The upfront and hidden fees
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