Are you thinking about investing in property? There are a number of fundamentals that you need to know about the investment process and mitigating your risk. In this article we explore some of our key tips for property investors to help you make the most out of your investment but also lessen the risks that are commonly associated with property investing.
Education: Immerse yourself in property investment
Just because you are no longer at school, does not mean that you should stop learning. If you are looking to invest in property, this often comes with a significant financial investment – this should not be taken lightly. Make sure to immerse yourself in all aspects of property, from blogs to online forums, publications and financial reports. Some great sources of such information are realestate.com.au, Investor Assist and Australian Property Investor.
Taking the time to research property prices, government charges, land tax and economic factors can help you to determine not only what type of property to invest in, but also which region in which to find that property. Quite often we get caught up in the local area – after all, that is our comfort zone – but often the best property investment opportunities lie outside this.
When considering your first investment property, it’s critical to consider the implications to your budget and personal financing. Learning about valuing and assessing properties will only strengthen your ability to find the right investment opportunity. Educate yourself on how the property market works, and research where properties experience capital growth versus yield. The implications of both on your cash flow can be significant.
Plan ahead and start saving
No matter how you plan to finance your investment property, having savings or equity to support this strategy is essential. Whilst having a deposit for the property may seem out of reach, this can impact where you search for an investment property. As many savvy buyers are aware, if you cannot provide the 20% deposit of the purchase price, you will also encounter lenders mortgage insurance (LMI) premiums on your loan. This can have an impact of thousands of dollars and should not be overlooked.
When financing an investment property, it is important to not only consider the purchase price, but also how you are going to finance the loan and any ongoing costs associated with the property. Such items including loan repayments, maintenance, rates, repairs, improvements and more.
To support your goal of investing in the property market, you may wish to consider options to increase your savings strategy. This can often be supported with the advice of a financial planner who can not only help you create a budget, but also provide additional financial guidance. Having a budget in place, and sticking to it, can also assist with seeking approval from a lender by showing financial discipline.
Consider your borrowing options
Many first-time investors don’t realise that there are multiple ways that you can finance an investment property. Quite often, the investor is undergoing the journey on their own, or with their spouse/partner, but there are also options which involve two or more owners – this type of finance is referred to as co-borrowing. This can be a great option if you and the other party have similar financial goals and circumstances. The parties enter an agreement where you share the costs of ownership including loan cost, stamp duty, and ongoing costs such as maintenance and repairs. It should also be mentioned that this type of agreement means that if one party is unable to meet their repayments that the burden falls on the other party. Banks like this because you are essentially spreading the risk.
If you have a self-managed superannuation fund (SMSF), there may be an opportunity to use the equity within the fund to purchase an investment property. Yet this would arguably be more suitable for the season investors.
Consider the tax implications of property investment
Whilst one of the key tax benefits in the form of negative gearing is commonly discussed, other tax implications should also be considered. Many costs associated with owning a property investment may be tax deductible. These include fees paid on your loan, repairs, maintenance, etc in addition to any losses arising from the property (eg. where the rental income is less than the ownership costs).
The flip side of this is the potential impact of capital gains tax (CGT) which are realized only when you sell the property. Whilst CGT is typically not applicable on the home you live in, investment properties do not escape this sometimes onerous tax. The common “flipping houses” strategy that many investors take often mean the purchase and sale of a property within a 12 month period. The Australian Tax Office (ATO) has a great deal of information surrounding CGT and it is important the potential investors take the time to research and digest. If you hold the property for longer than 12 months there is the opportunity that resident individuals and trusts may reduce their capital gains by 50% – or 33.33% for superannuation funds. There are three methods to work out your capital gains, and your financial advisor will be able to assist with this as part of your long-term financial plan.
Capital growth is not guaranteed
As much as we would like to, no one can predict the future. This means that growth in your equity is not guaranteed. The market value of your property can go up or down, and as such the equity within your property can also rise and fall. Many investors approach property with the intention of building equity in the first property, then leveraging that equity to finance a second property and so on. It’s also important to remember that this equity can also be used to secure a loan for other investments such as renovations or shares.
Whilst you may have equity in your home, this does not necessarily mean that you have the ability to borrow against it. This all comes down to the lender and loan criteria. This is where the role of a mortgage broker is invaluable. We can help guide you as to what is viable, the best lenders to consider, and also help provide advice as to the cost of maintaining the loan. Regardless of whether you have equity in your home to leverage, you still need to consider your ability to finance these ongoing costs and take into account the long-term impact of taking on additional debt. These all come with risk that needs to be considered including adjustments to interest rates, unexpected major repairs, and other impacts on your personal cash flow.
Don’t get emotional
This is where it gets a bit tougher. Quite often we get caught up in the journey of purchasing a property – after all, our main experience with doing so has been emotional. Trying to find the “perfect home” for you and your family is, of course, emotional. Investment properties are something entirely different. They need to be assessed practically, almost ruthlessly, with a critical eye for the financial implications and opportunities that may come with it’s ownership. Interestingly it has been reported that when buying a home about 90% of your purchasing decision will be based on emotion and only 10% on logic. But. This is not you buying a home – it is an investment. Buying an investment property should be based on analysis – not heart. This can seem cold and calculated, but that is exactly what it is and needs to be. Some key considerations are:
- Will it provide the gains and cash flow that you require?
- It is in a location that will attract good quality tenants?
- Is it likely to attract long term capital growth?
- What is the risk of significant repairs and/or maintenance costs.
In a nutshell
Investing in a property should not be entered into lightly. Take the time to research and educate yourself on the property market, and expand your research beyond your local area. Consider the various borrowing options available to you, and how you will finance the ongoing costs associated with owning a second (or more) properties. Whilst you may be able to leverage the equity you have in your existing property, don’t take it for granted that this ensures you can secure a loan. Consulting with your financial advisor and finance broker is going to provide a great foundation of knowledge and advice to base your decisions upon.