Potential residential property investors are often bewildered by the wealth of information available regarding property investing, which is often contradictory.
First time property investors should take the following points into consideration before embarking on their property purchase but always check their own circumstances out with their accountant before committing any funds to the project: -
1. Rely on the numbers and leave emotion out of the transaction as you will not be living in the property
It's not critical that you adore the colour scheme, the type of handles on the doors or some other features of the property - the numbers e.g. purchase price, rental return, supply of rental property in the market and potential capital gain, must stack up. These details, apart from potential capital gain, are readily available from real estate agents.
2. Start small time - you will be able to sleep at night that way
Start with a lower priced investment property and a smaller loan. As you will be, most likely, subsidising the loan repayments, there is less pain with a smaller loan if you are not receiving rental income during any period. Being able to sleep at night is always an investor's objective.
3. Treat your property investment as long term
Unless you have bought a red hot bargain, you won't be able to achieve substantial short-term gains and you need to be able to recover your purchase transaction costs such as stamp duty and legal fees together with your selling transaction costs. Of course, capital gains tax also comes into the equation when you sell. Capital gains tax will apply when you make a profit after owning the property for more than 1 year (from purchase exchange of contracts to sale exchange of contracts)
4. Either buy locally or within driving distance from home
It's reassuring to be able to regularly see the property and know that it still exists and you are likely to be more familiar with the market. This does not mean that you should necessarily be purchasing the property next door to your own home as it's advisable that you remain at arm's length from your tenant and enjoy some anonymity. If you do purchase in an area that you are not familiar with always ensure that that obtain an independent valuation on the property you are purchasing even where you are using your own home as security.
5. Engage the services of professionals
It makes good sense to use the services of an accountant, a lawyer, a realtor and a mortgage broker to assist you in purchasing and managing your residential investment property.
6. Obtain advice from your accountant regarding the name in which the property should be purchased and the loan obtained
This decision can have substantial tax implications and should not be taken lightly.
7. Consider a fixed interest loan when borrowing
It will provide interest rate certainty. Whether you borrow interest only or with principal and interest repayments depends on your own circumstances. Your home loan specialist and accountant should be able to assist you with this decision and whether you borrow on a fixed or variable basis.
8. When selecting a property to purchase look for proximity to transport and amenities and avoid high maintenance features such as a swimming pool or a large garden
It's important to purchase property that a tenant will be happy to live in. You should try to appeal to the mass market e.g. 3 bedrooms and covered car parking in an area where there is a high demand for and not an oversupply of vacant rental accommodation. When you buy properties, which incorporate a swimming pool or a large garden area, you can count on the fact that the maintenance costs will increase without any increase in rent.
9. Don't attempt to squeeze the last drop out of your rent
It makes more sense earn a lesser rent but to have long term tenants who will look after the property and treat it as if they owned it. It's also smart to explore the cost of insurance cover over rental income and property damage.
10. Don't stop with a single residential invesment property
The first purchase can be a daunting process but the second and subsequent properties are easier to purchase than the first.
Bob Ward is a director of Australian company, Lot 109 Pty. Limited, which is a real estate training and public relations consultancy -
Real Estate Consulting
