From passive income to appreciation, stable cash flow, tax advantages and leverage, investing in property is widely regarded as a dependable means to build wealth, which is why it’s become a bit of a national obsession. But finding the right property to tick the boxes and having a solid understanding of the intricacies of property investment is where many fall short. To help you navigate these, we’ve created this guide to choosing the right investment property.
Step 1 – Get a handle on your finances
The first step in any investment is getting a clear picture of your budget. When it comes to property, this means understanding how much you require for a deposit (or any equity held in an existing property) and being realistic about your capacity to borrow factoring is some interest rate rises. This allows you to hone in on suitable properties from the outset rather than being swept up in attractive but possibly unaffordable investment.
Step 2 – Understand your goals
Are you looking to make a quick buck by flipping a property, chasing rental yield or playing the long-term capital gain game? It’s essential to understand your goals so you can choose a property that aligns with them. Here’s a snapshot of the most common property investment strategies and what they deliver:
- Capital growth – capital growth generally happens when demand exceeds supply. This usually occurs in established areas with great amenities and often comes with a hefty property investment price tag. Buying in a desirable area typically means the rent you’ll get from your investment property won’t cover your ownership costs, making this a longer-term investment strategy.
- Rental yield – a property with good yield will leave you with cash in hand once all the related expenses have been paid. Properties with strong rental yields are often found in places like university towns where high demand for rentals exists, but purchase prices remain relatively steady.
- Flipping – also known as wholesale real estate investing or residential redevelopment, flipping a property can easily be a full-time job! It involves either purchasing a home to renovate or change cosmetically (and reselling within a short time for profit) or choosing a home in a rapidly appreciating market and reselling with minimal investment. While large sums of money can be made this way, you’ll need to be aware of your tax obligations.
Step 3 – Assess the risks
Investments of any kind come with a degree of risk, so getting well-versed in the specific risks associated with property investment and considering whether you sit on the conservative or thrill-seeker end of the spectrum is essential. The general rule of thumb is that the higher the expected return, the higher the risk; without any risk, there’s often very little reward. The main risks to consider are:
- Interest rate changes – interest rates fluctuate, so plan for several scenarios. Interest rate rises need not be a deterrent, as long as you get your finances right from the get-go.
- Market fluctuations – as with interest rates, the property market can change overnight. Think about what this means for your investment strategy.
- Overcapitalisation – if you plan to renovate, ensure you have a firm plan and stick to a budget. If you spend too much, you could risk reducing your profit or even losing money.
- Lack of liquidity – it’s hard to convert property into cash, which makes it an illiquid
investment. The risk is that if you’re forced to sell the property (for whatever reason), you might have to do so at a price you wouldn’t usually accept.
- Tenancy troubles – from longer than expected vacancy periods to property damage, being a landlord isn’t always a bed of roses. Make sure you can cope with whatever comes your way and definitely consider employing a First National Real Estate property manager.
Step 4 – Narrow it down
You’ve got your finances sorted and a solid understanding of your goals, so now it’s time for the fun part – house hunting. Here are 4 crucial factors to add to your checklist:
- Location, location, location – it’s a real estate cliché that’s wheeled out repeatedly, and for good reason. Location is one of the key ingredients in projected capital growth, as is choosing a location that’s pegged for future growth. Good indicators of this are steady population growth and increasing investment in local infrastructure. Additionally, factors like proximity to essential amenities like public transport, schools, medical practices, shops and restaurants will not only impact the value of your property but make it more appealing to tenants – securing vital rental returns.
- Know your type – consider your potential tenants or future home buyers and what they want in a home. Looking to attract young families? A bath might be a deal breaker, and a decent outdoor space. Does the area have an older population? Loads of stairs and high-maintenance gardens might be a turn-off.
- Look to demand and yield – for each property that pops up in your search, ensure you understand what it would look like from a yield perspective. Find out vacancy rates in the area and factor any downtime between tenants into the equation.
- Condition counts – is the property rental ready, or will you need to put money into getting it up to the required standard? Make sure you factor in the costs of repairs and the lost rental income. Also, it’s essential to account for ongoing maintenance costs based on the condition and age of the property. Will fittings and fixtures need replacing in the near future? Will the roof need replacing in a few years? Remember, there are also tax considerations based on the depreciation of your asset.
Enlist an expert
Getting it right with property investment takes a lot of homework, knowledge and experience, which is why having an expert in your corner is invaluable. Once you’ve understood the basics in this guide, a professional will provide support and guidance throughout your journey and work with you to find a property that ticks all the boxes. From accountants to property developers to lawyers, mortgage brokers and real estate agents, a wealth of resources is available to tap into. First National Real Estate has over 300 offices throughout Australia, New Zealand, and Vanuatu – that’s a lot of team members and a lot of knowledge! Contact us today to see how we can assist you on your property investment journey.