5 things you need to know before buying an investment property
What is an investment property?
Investment property is real estate bought for the purpose of earning money on it (through rental yield) and/or profiting from the sale of it down the track when the property goes up in value (capital gain). Most property investors invest for both the rental yield and the capital gain.
Buying an investment property is very different from buying property to live in, as the main goal is to make income and gain profit. This means that the things you’d normally consider when buying residential property will be different from the things you’d consider for an investment property. This usually includes things like your emotions, whether the property makes you “feel good” or feel “homely”.
1. Know your budget
Your budget will dictate what kind of property you can afford and where. So the first thing you’ll need to understand is how much you can afford and your monthly living expenses as holding an investment property will come with ongoing costs.
Your mortgage broker is your first stop. He or she will help you understand the costs of buying an investment property and whether you can afford to do so.
Once you have a rough idea of how much you can borrow, then you can consider the type of property that’s right for you.
2. Choose the right type of property
Here are some things to consider when choosing a property:
Location and local amenities – you’ve heard the cliche “location, location, location!” It’s there for a reason, and it’s because tenants are likely to rent somewhere where there are amenities close by such as schools, hospitals, shopping centers, and public transport. Think about the type of tenant you want to attract, as this will dictate what kind of amenities would appeal to them. E.g., for a young family, nearby schools would be desirable; and for singles, public transportation close by would be desirable.
Type of property – next, think about the type of property you can afford. Can you afford just a unit, a townhouse, or a family house with a large yard? The type of property you buy will have associated costs and advantages too. For example, a house will generally be more expensive, attract the biggest capital growth and rental yield, but also attract higher maintenance costs. A unit on the other hand is cheaper and will have less maintenance but there are strata fees to consider.
Age of the property – older properties are generally cheaper but need more maintenance so be wary of ongoing costs associated with them. Also, factor into your budget the potential cost of renovating the property to a habitable standard. Newer properties are generally more expensive but you can claim the depreciation of the property from the property’s taxable income, reducing your overall tax bill.
Property features – certain property features are attractive to tenants and therefore can increase the rental income. Things such as a garage, extra storage space, extra bedrooms and bathrooms, an abundance of natural light, and a practical layout are some of the things that are attractive to tenants. As mentioned previously, you will need to have an idea of what type of tenant you want to attract as this will help you find the type of property to buy.
Rental demand and yield – you need to understand whether there is demand for the particular area and property type you’re looking at, as this will determine whether you’ll have ongoing income from your property. You’ll also need to understand rental yield, which is a calculation of how profitable property is based on the expected annual rental income balanced against the cost of maintaining the property. Ideally, you’d want the rental income to be greater than the cost of maintaining the property to make a profit. We recommend doing plenty of independent research and speaking to your friendly real estate agent and financial adviser to get a better understanding of rental demand and rental yield, respectively.
3. Choose the right type of mortgage
There are many great options when it comes to choosing the right type of mortgage, so make sure you speak to your mortgage broker and financial adviser to see which product would be best for you. Keep in mind that the interest you pay on an investment property loan is tax-deductible, so it’s important to understand tax implications and the types of interest-only loans available. Depending on your circumstances you may choose a variable rate, or a fixed-rate loan and a mortgage broker can give you the figures of what these amounts will be over the life of the loan to help you decide.
It’s important to structure your loan correctly, and it’s a good idea to keep your home loan separate from your investment loan so you can keep track of the accounting.
At RPN Global Sales, we have a network of mortgage brokers and financial advisers we can refer you to. Please contact us on 0434 056 728 if you need recommendations.
4. Find a good property manager
A property manager is a licensed real estate agent whose job is to manage your property and be the middleman or woman between you and the tenant. But more than being a middleman, the property manager can give you advice on your legal rights and obligations as a landlord, as well as vet potential tenants for you and do background checks to ensure you find the right tenant. They also do the “stressful” work of chasing up unpaid rent so there’s very little for you to do.
Property managers can also do property inspections at your request (which we recommend, in addition to their scheduled checks) to ensure the tenants are looking after your property.
What’s great about property managers is that the cost you pay for them is just a small percentage of the rent, which you can claim as a deduction at tax time.
5. Legal and tax implications
There are legal obligations you will need to be aware of as a landlord, and these include responsibilities before, during, and after a tenancy. Your property agent can advise you what your responsibilities are but if you want to know more, check out your State’s Fair Trading website. Click here for the NSW Fair Trading website.
It’s also important to understand the tax benefits and liabilities of owning an investment property, such as negative gearing and capital gains tax (CGT). Your tax adviser or financial planner can give you more information on this, but we recommend also doing your research. The ATO has a free guide on Rental Properties and a Rental Property Video series to help start you off in the right direction.
In conclusion
It’s important to remember that investing in property is not a “get rich quick” scheme. It’s a long-term investment strategy to make a regular income and take advantage of tax benefits. Our advice is to know your financial goals, do as much research as you can, talk to real estate agents, get to know the areas you want to invest in and be prepared to be in it for the long haul. At RPN Global Sales, we are ready to answer any questions you might have regarding investing in property. Contact us on 0450 914 535 and speak to one of our friendly agents.
