Top five tips for your first investment property
Investing in property remains one of the smartest ways to create wealth, whether you are looking to create a passive income stream, reduce debt, minimise tax, or plan for retirement (or all of the above). However, for first time investors, there is an overwhelming amount of information, resources, and opinions available, many of which seem conflicting.
So, we’ve put together a list of tips for those who are looking to start their property investment journey. These are some of things that we consider essential to consider when investing in property:
1. Sort out your finances
The most important early step of investing in a property is finding the right type of financing for your investment, and making sure the mortgage you do select is a well structured loan that is compatible with your budget. Don’t feel pressured into the first loan option that is presented to you – shop around until you are confident the the loan you’ve selected is suitable for you. We recommend getting a good mortgage broker who understands your situation to get the best deal for you (read our latest blog for more information on getting the best deal for your mortgage!)
Once you’ve secured the right loan, knowing and understanding your cash flow is key to ensure that an investment is sustainable for you in the long term, and will put you in a better financial position than prior to investing.
Weekly cash flow = gross rental income – total weekly ongoing costs
Aside from loan repayments, the types of ongoing costs you can expect from a property generally include costs such as insurance, land tax, council and water rates, and agency fees. In addition, you should always try to account for unexpected situations such as vacancy between tenants, or unexpected maintenance costs. A general rule of thumb is to allow 10% of the property’s value for ongoing costs.
2. Use the equity from an existing property
If you already have your own home, but are looking to purchase your first investment property, you can leverage the equity you have from your home. Or, if you are already on your investment property journey, you can leverage the equity of those properties.
Equity is the difference between what your home (or other existing property) is worth, and how much you owe on it. In simple terms, if your home is worth $600,000 and you still owe $350,000 to pay off the mortgage, then your equity is $250,000. You can use this as a security with a bank, and borrow against it.
3. Understand the market and where you are buying
Whether you are familiar with the area you want to invest in or not, it’s important to rigorously research the market and understand how it is growing, and how it will deliver a return on investment for you. Some key aspects to know about the area prior to investing include:
- Rental yield: A property with a high rental yield is one where the rents are high compared to property value, giving you a higher return on investment
- Vacancy rates: If the vacancy rates are low in the neighbourhood, it’s a good indicator that the area is in high demand for rentals and you won’t have trouble renting the property out to tenants
- Previously sold properties in the area: This give an idea of past performance and growth of the area
- Current development and proposed plans for the area: It’s important to check the current and proposed plans for an area, to get an idea of how it might be changing in the future. Zone changes or future developments can have an impact on the property’s value in the future.
4. Pick the right type of property to suit your investment goals, not your personal preferences
The investment property needs to be attractive to future renters, not necessarily to you. This can be hard to do, because it’s hard to separate your emotions and your rational thinking, when buying property (read our blog on emotional investing for more tips on how to make investments with your head, not your heart).
Think about what kinds of tenants the property will attract, and what kind of tenants you want renting the property. Will it be suitable for students or as a share house, or better for young families or professional couples? Is the property liveable? What is the floor plan like? Are there green areas nearby? Is it noisy? How well serviced is it by essential infrastructure such as transport and retail centres?
5. Find a good property manager
Managing a property alone (self-managing), particularly for first time investors, may seem like a good way to save on money. We get it, those agency fees can seem really high. Until, you factor in all of the elements of managing a rental property, such as finding the right tenants, conducting inspections, arranging any maintenance, meeting all of the legal obligations of your tenants, arranging leases and ensuring little to no vacant periods in your property…. You quickly see why this is a full time job, and those fees are well deserved. Paying a professional to manage these tasks for you not only means you will save time (extremely valuable resource), but it means you can allow an expert to get the best outcome for your rental property in terms of the best possible tenants, and therefore a higher return on your investment.
Property is a long term investment, so it’s important to take appropriate steps to ensure that it is sustainable and successful in the long term. Adequate research and preparation are essential! If you would like some assistance in preparing for your first property investment, we would love to help you.
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