10 tips when buying an investment property
With talk of softening property prices in some parts of Australia the team at Naritas has seen an uptick in enquiries from people looking to take advantage of gaps in the market. Set against this backdrop we thought it apt to share some of our tips on how to maximise your chances of having a positive experience investing in property.
Jump to section:
- What do you want to achieve?
- What type of property should you purchase?
- Old or new?
- Location, location, location
- What can you actually afford?
- How to set up the purchase
- Check your emotions at the door
- Timing is key
- Ask for expert advice
Understanding your objectives is key to finding the right investment property. The actual property itself is rarely the end goal when it comes to investment (unless you plan to move into the property in retirement). As such, it’s usually the financial aspects of the acquisition that most people are concerned about.
First and foremost, decide what your end goal is and then create a plan to get there within a realistic timeframe. Common goals from property investing may be long term capital gains, seeking high yield properties to develop passive income streams or buy/sell ‘flipping’ strategies. Most importantly, remember to review this plan regularly as your situation and the property market changes and to account for risks in your approach. Claims of big returns are literally always coupled to big risks, so due diligence is paramount.
Understanding what property is going to best work for your situation is key. At the most basic level, seek information from a variety of sources to confirm whether the signs are there that the property will be in hot demand from renters and possible owner-occupiers down the track.
It’s best to do your research to see what types of properties are renting quickly and what properties are staying on the market for longer periods of time. At Naritas we often find ourselves providing reports from CoreLogic, Valex and SQM research to our clients to assist with this aspect of determining trends and evaluating potential strengths & weaknesses of the proposed purchase.
It’s the age-old debate: should you buy a renovator’s delight, or something you can rent straight away? It’s great if it can be rented out as is, but potential to renovate should also be considered. The ability to add value to the property is a good tick as it will increase rental returns when done cost effectively. Don’t immediately write off a property just because it needs a paint job or the kitchen cabinets need to be replaced.
If buying new, remember to weigh up the benefits of depreciation against the risk factors of an inflated price due to foreign buyer influence. It’s also worth noting that the agent commissions on new developments can be significantly larger than on existing dwellings. If the agent is getting a 5% commission this may be an important factor if your strategy involves a near term exit.
Location is critical to performance. Things to consider when it comes to location include:
- How far it is to the CBD or business area?
- What is the proximity to schools?
- Are local shops within walking distance, or will tenants have to get in their car to pick up the essentials?
- Where are the public transport options?
- What other amenities are close by?
Always check your financials before deciding to purchase a property. Get pre-approval and make sure you have all extra costs available, including conveyancing, inspections and any taxes – and always ensure you have a financial buffer. There are ample tools available on the Naritas website to help you get started with your research. Given the fact that we are presently at record low interest rates, check out our mortgage stress calculator to model scenarios of affordability if rates were to increase. Alternatively, ask one of our staff to help you with the process.
When it comes to investing it’s important to understand how to set up the purchase so it benefits you most. The entity should protect any existing assets and be tax effective.
You can purchase in your name, through your super or through a trust, but always understand how the purchase will affect you and your family. Expert advice will assist in maximising your benefit.
You want to appeal to the highest number of tenants, so look for properties that offer that little something extra, like a second bathroom or a lock-up garage.
Also look at properties that appeal to many segments. For example, a lift may appeal to both retirees and a young family, as both will be looking to avoid stairs. Just make sure the benefits outweigh any extra costs.
In short, this purchase is probably not going to represent a home for you to live in so there doesn’t need to be an emotional connection to it. One of the most common reasons we see for people failing to meet their investment performance goals is that they have applied their biases to renovations (over capitalising) and have put too high a level of esteem on certain aspects of the property that the average renter would not be willing to pay for.
When it comes to property investment, it should always be about which property will give you the best return, not which one is most suited to your furniture.
You need to understand the market you’re investing into and its dynamics. The concept that the ‘property market’ performs in a uniform fashion regardless of the property type or location is a common myth. For example, houses in the inner city ring of Sydney and Melbourne may have been experiencing solid capital growth for the past 12 months, the same can’t be said for high density apartment dwellings located in outer suburbs of Perth and Canberra.
While there are investment opportunities around most of the time, some market conditions are more favourable than others. If you don’t fully understand it all, ask for help.
Your Naritas credit adviser can guide you on the path of selecting the experts you need to talk to when it comes to real estate and investment. This means education on how to select an accountant, real estate agent (if your strategy to is flip properties), lawyers and valuers.
An important note for caution is to understand the risks of dealing with ‘one stop shops’. Lawyers recommended by the property vendor and credit advisers recommended by a real estate agent trying to sell you a property, especially if there is financial incentive involved (which there typically is), present inherent risk of a conflict of interest occurring. Protect yourself by seeking a variety of opinions and by selecting experts entirely separate from the sellers of the real estate you are considering investing in.
How do I get started with getting advice from Naritas?
- To make an enquiry online, click here.
- Alternatively please feel free to phone us on 1300 558 887 during business hours.