"Not all properties are going to suit your property investment goals." I work with a lot of first time property investors and this is usually the first thing I say to them. Some nod in agreement while most will stare at me blankly for a minute.
Before you buy an investment property, there are a number of important decisions you have to make. Taking the time to think about them now, will put you in the best position to realise your financial goals through property investing.
To get you started, I’ve put together what I believe are some of the most important things to consider before you buy an investment property, to help you avoid making some very costly mistakes.
Property can be a great vehicle to deliver your financial goals but knowing what your goals are first are key to achieving them. For most of the investors I speak to, their investment goals fall into one of the following categories:
- Replace their income with rent generated from their investment property
- Set themselves up for their future
- Add equity and wealth
- Secure property for their children
- Do a property development
Each of the above goals is quite different and requires a different kind of property to achieve them.
The biggest mistake most investors make is not aligning the property they purchase with the result they want to achieve.
What strategy suits YOUR financial goals? The emphasis here is on you. Are you more interested in building equity and long term wealth through capital growth? Or is replacing your income through high rental yielding investments more what you’re looking for?
An investment property is a big purchase so you’ll probably be discussing it with family and friends. Some may have an investment property, some may not but they’ll all have an opinion on where the property market is heading and what suburbs you should be investing in. Don’t listen to any of them.
Focus on what your end goal is and do your own research on where you should be investing your money.
Understanding your investment strategy will help you narrow down the types of properties you should be looking for. If you’re after high rental yield, looking for properties with low rental yields in suburbs with high vacancy rates is wasting your time.
Identify the characteristics of the property you want to purchase. What kind of property is it? A house, unit, apartment? How many bedrooms? What’s the demand for these types of properties like in the area? Is the council planning on changing the zoning? Is there more infrastructure planned for the suburb?
Do you research by speaking to agents, checking out resources at the council and don’t underestimate what information can be found by doing a Google search of the suburb.
Most people will buy in areas they’re familiar with, usually close to where they live or grew up. But if you’re a serious investor, you should be trying to invest in suburbs with good growth potential and high rental demand. The growth will drive your equity in your property and the rental demand will make sure your vacancy periods are short.
There are some amazing resources available on the internet now (which I’ll discuss in a future post), so you can easily research what similar properties have recently sold for, see rental demand and previous rental history for properties similar to what you’re looking to purchase. You can become an expert on any suburb, anywhere in the country.
Identify suburbs you’re comfortable with and start speaking to local agents and going to inspections to get a feel for the market in the area. Local councils are also a great resource to research infrastructure and any planned developments to a suburb.
The best time to buy an investment property is when you find one that will help you achieve your financial goals. There are great opportunities in both bull and bear markets so just know what you’re looking for and identify ways of spotting the opportunities when they arise.
The very first thing you should do when deciding to invest in property is speak to your bank manager or mortgage broker and find out how much they’re willing to lend you. Before you start looking at what to buy, you need to know what you can afford to buy.
This is also a good time to look at your personal budget.
Make sure you can afford to cover all expenses your property incurs – owners corporation fee’s, council rates, utility rates, maintenance costs and don’t forget about having to cover the mortgage repayments over any vacancy periods between tenancies. You want to ensure you have a financial buffer in place to cover any unaccounted for expenses.
This is where a good accountant and financial planner come into play. There are many benefits to property aside from capital growth and rental yield and having a good team of advisors will help you identify the right structure for your investment property.
Whether your property is held in your name, in your super fund, a family trust or company you need to understand what the benefits are and how they impact you now and in the future when you decide to sell.
It’s important to own your property in an entity that protects your assets and legally minimizes your tax.
Once you’ve purchased your property, you’re going to need to find a property manager to look after your investment for you. Be thorough in your selection process (just as you were in selecting your property) and look for an agent with the right systems and procedures to ensure they can handle any issues that may arise with your investment property.
The difference between a good property manager and a bad property manager is $1000’s of dollars in your pocket. A good agent will market your property well, be proactive on showing prospective tenants through and in turn will lease your property quicker. Everyday your property sits vacant, you’re losing money on your investment.
But it’s not just leasing your property where a good agent will add value. At every stage of the leasing cycle, you should be assured that your Property Manager will handle all the maintenance efficiently and cost effectively, make sure your rent is paid on time and any disputes are resolved with your interests as a priority.
A good property manager is key to the success of your investment, so make sure you take the time to speak to interview a few before deciding which one you trust with your investment. If you’re going to pay a professional, you might as well find the best one you can.