Getting Started In Property Investment
Getting started in property investment
Launching yourself into property investment can seem daunting. But, by following some sound advice, it doesn’t have to be so scary. Here are the steps to get you on your way.
1. How much money do I need to get started?
The first step is one of the most obvious; ask yourself: do you have enough money?
Start by calculating what your income and expenses are and separate your ‘surplus money’ from any expenditures you’re already committed to. This will help you on your way to work out how much you might be able to afford to spend.
How much you need to start your property investment journey can vary widely depending on your circumstances. There is a myriad of factors that will influence your starting budget, including your investment strategy, location and housing type.
Getting pre-approval from a lending institution will allow you to find out if you’re eligible for a loan and how much you’re able to borrow. It gives you greater clarity about how much you can afford, which properties you should be looking at and confidence around making an offer.
2. Setting investment goals
Next, set your goals. What are you hoping to achieve with your investment? Common goals include gaining an income stream or providing for retirement.
Start by setting your long-term goal. Then, break it down into smaller steps and shorter-term goals. This will help you stay focused and not lose sight of what you’re hoping to achieve.
Some common goals for investment include planning for retirement, providing an asset for family members, earning a regular rental income, building equity to buy a home or other major purchase, or minimising taxable income.
It’s important to always keep in mind that property investment is usually a medium to long-term prospect. Consider how your financial situation is likely to change over these time frames.
3. Choosing your strategy
Once you have established your ultimate goal, your strategy will generally fall into three categories: capital growth strategy, cashflow strategy or renovation.
Capital growth strategy
A capital growth strategy involves buying a property with the expectation it will increase in value over time.
In most cases, this strategy is best suited for medium to long-term investors who aim to buy when the market is down and sell when it’s at a high.
Cashflow strategy
A cashflow strategy places less emphasis on capital growth and more on providing an income stream.
Generally, this strategy involves purchasing a rental property that will provide greater income than the mortgage repayments, maintenance and management costs associated with the property.
While this strategy can provide income, it may take longer to build equity, while there may also be fewer tax benefits involved.
Renovation strategy
A renovation strategy, sometimes known as ‘house flipping’, involves purchasing a property that needs improvement, renovating it and then selling for a profit. This strategy may also be used to increase an investment property’s rental income.
This approach can work on a shorter time frame that other strategies. Rather than waiting for the property’s market value to increase, you’re making direct physical investments in the property itself.
A potential hazard can be if the renovation costs are more than you anticipate. If your financial situation is dependent on a quick turnaround and the market dips when you’re trying to sell, some of the value you have added may be negated.
4. Research
Property investment should always be based on facts and figures, not emotion. To give yourself the best chance of success, take your time.
Remember, the old property adage — location, location, location.
Your investment is likely long-term, so will the area you buy in maintain or increase its value? Look for factors such as nearby infrastructure projects, accessibility to desirable jobs and lifestyle activities.
Look at the median price and year-on-year growth for property in the areas you’re considering. Investment data from reputable sources can help you understand what the rental yield might be.
Consider tapping into some professional advice. It could be good to talk to a lending specialist, such as a mortgage broker, to get a thorough understanding of the products available to you and decide which best suit your needs.
Your accountant can advise on tax issues and how to structure your borrowings; local real estate agents can provide insights into the local market; a depreciation specialist can advise what losses you can claim against tax; and a conveyancer can talk about contracting and legal affairs.
Depending on your purchase, approach your council about any possible costs related to redevelopments or renovations.
5. Pros and cons of property investing
Like any investment, there are risks and benefits you should weigh up before making the leap.
Pros of property investing
The upsides to property investing can include:
- Property is a well-known, familiar investment vehicle that you can find a wealth of information and support for.
- There’s a long list of property costs that provide tax benefits, such as negative gearing.
- Investing in property can yield long-term returns, both in terms of rental payments and in increased market value over time.
- Property is generally less volatile than other types of investment.
- You can access equity you build in the property to help finance other purchases.
- Property allows you to maintain control of the decision making, whether it be improvements to the property, when to sell, tenant selection and more.
Cons of property investing
Every type of investment has potential downsides. Some associated with property investment can include:
- Large upfront costs, with potentially more after the purchase. These can include legal fees, stamp duties, building inspections, etc. Ongoing costs may include real estate management fees and maintenance costs.
- If the property you’re buying is not intended to be your primary residence, when you come to sell, capital gains tax may be applicable.
- Costs can increase if interest rates rise.
- A large outlay into a single asset class means your risk profile is not diversified.
- There is no guarantee your large investment in a property will pay off. Most Australian markets have shown great resilience in the wake of the COVID-19 pandemic and recession. But, like every investment, property is not a “sure thing”.
**Article written by realestate.com.au
