Top five tips for investing in property
Investing in property can seem a daunting prospect, but it’s one that, when the strategy and the timing are right, can be both extremely profitable and relatively low maintenance. It’s an area where putting the time in at the start can really pay off later. Seasoned investors will tell you it’s pretty much impossible to do too much research into your target area. Just like when purchasing your own home, you need to get under the skin of an area, learn what tenants are looking for, get a clear picture of actual sale prices, not just listing prices, and make sure you have all the facts and figures to hand when the time comes to make an offer.
Which brings me to our starting point – do the numbers. Before you even start looking, you need to take the time to set your budget. Calculate how much deposit you can realistically put down, taking into account purchase costs, and then go and see your bank or a mortgage broker to discuss what level of spending you can afford. Remember to factor in rate rises, and chat to them about the option of an interest-only mortgage if that is something that will work for you.
Once you’ve established how much you can borrow, check out our list below of the 5 top things to consider when buying a rental investment:
- Return On Investment – yes, it’s an obvious one. ROI potential varies dramatically between areas, from as low as 3% to as high as 15%. ROI is calculated by taking the anticipated annual return (weekly rental x 52 weeks) and dividing it by the purchase price. For example a $350,000 property returning $400 per week has a gross return of 5.9%. Factor in your rates, insurance, repairs and maintenance and anticipated vacant time and you’ll have a net return figure. Many investors look solely at this formula when deciding on a property.
If a property covers all its costs, it’s not going to place a huge strain on your cashflow, and you can in theory sit back, let it cover itself and gradually accumulate capital gains.
- Location – this affects everything, not just the purchase price! Consider the affect location has on capital gains, the kind of tenants you’ll get, the income potential, how many tenants are vying for the home, potentially even the level of maintenance to expect. Also the location will determine the zoning of the area, hence what can be done with the land in the future.
- Is it in demand – understand basic supply/demand economics. If there is a solid supply of something, prices are generally more static, as items become more scarce but demand remains, prices can go up, so naturally it’s tempting to buy when there is a lot of choice and more competition between vendors. An unusually high number of listings in one neighbourhood can either signal a seasonal cycle or perhaps a drop in demand for that area. Work out which one it is before buying. Also, it’s worth paying close attention to rental vacancies in an area – if properties are sitting for a long time untenanted, it may be worth re-evaluating your plans and looking elsewhere.
- Are you time-poor – some properties quite simply require too much time and management to make them smart investments. For example, holiday rentals take a huge amount of time to care for, low quality properties can need a lot of maintenance and having a lot of tenants in a home can mean a lot more wear and tear on a property. Much as buying cheap and generating high income with lots of tenants can be tempting, offset the benefits with the drawbacks to your lifestyle.
- Unit, apartment or house – it’s vital to understand the differences between Stratum in Freehold, Leasehold and Fee Simple legal tenures when purchasing, as each has its own implications for owners. It’s a lot to discuss, so, if you’re interested, call me for a chat and I can explain the positives and negatives of each type of tenure.
In summary, there is no absolute correct recipe for getting investment properties right. Starting or growing a portfolio depends on a multitude of factors, many of which are tied up in your personal situation rather than in the property itself. Work out your priorities, then stick to them. Try to remain as impartial as possible about properties – the astute investor doesn’t get emotionally attached.
And finally, always consider using a professional property manager such as hoamz to rent. For a minimal amount you can be sure your property is well cared for, meets all your legal responsibilities, that your rent is at appropriate market values and best of all, it frees up your time.